Can Economic Troubles In Greece Affect Portfolios?

With the latest economic troubles going on in Greece, some are getting worried about their portfolios and how they could be possibly affected. In one of the latest segments of Matson Money Live! Mark Matson and his team break it down by the facts, stats and historical data to review the possible impact. But before Matson and his team get into the figures, everyone must first understand what’s going on in Greece.

The Crisis

Over the last 10 years or so, Greece has borrowed money from the central banks and governments of many European countries. According to BBC news, Greece “used the money to run the country, pay for the 2004 Olympic Games and also for things like big pay rises for people who are paid by the government.”  The same article also noted that Greece has “found it hard to pay it back because when you borrow money, you have to pay what’s called ‘interest’: meaning you pay back more money than you borrowed to begin with.”  In early July 2015, the European Central Bank the European Central Bank refused to provide more of the emergency loans that Greece had been relying on to stay afloat, because Greece couldn’t reach a repayment agreement with its European creditors.

For a period of two weeks, this action rippled into a big problem for Greece. Greek banks shut down and restricted the amount of money that could be dispensed to bank customers – people were only allowed to withdrawal 60 Euros per day, per person. This caused Greeks to worry that their money would disappear. On July 13, 2015, the European Union reached a new bail-out deal with Greece, which ended the immediate crisis and the situation is beginning to stabilize. However, the underlying problem continues because according to the BBC article, Greece still owes 323 billion Euros to various countries and banks within Europe that could all lose their investments if Greece is unable to repay the loans. This situation can obviously affect other economies, but what implications could it have on investors?

First, coverage of the economic situation in Greece has been over-hyped, causing more panic than necessary.  Investors need to understand what’s really going on. One of the first things to note is that everything portrayed on the news isn’t always doom & gloom needs to be put in perspective. Michele Matson points out that Greece isn’t the biggest impact on our economic structure.

Investors should note that, historically, there have always been bankruptcies and defaults occurring from time to time. More importantly, a default doesn’t necessarily mean no repayment.  It may mean that the defaulted debt will be restructured and paid back over a different time frame or subject to different conditions. This has happened right here at home. For example, the city of Detroit declared bankruptcy and entered into a restructuring plan in 2014 and three cities in California are having big financial problems. Financial bankruptcies and defaults happen more that you might realize and it’s not just foreign countries that struggle with the problem.

In fact, the credit default risk associated with municipalities and emerging markets is a reason why Matson Money doesn’t invest in municipal bonds or emerging market bonds. This strategy reduces the risk of holding those types of investments. But it should be noted that this strategy is not a guarantee of results and is one of the many different ways investors could strategize their own portfolios. Mark Matson and his team want investors to know that the news about Greece isn’t as bad as it seems.

Watch the segment about Greece below:

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