It’s taken several years to get here, but the Greek debt crisis appears to be finally reaching boiling point.
Here’s what we know and what we think might happen next.
Stock markets across Europe have opened lower this morning after the events which took place over the weekend.
As I type this, the FTSE 100 index of leading UK company shares is down 99.62 points (or 1.48%) at 6,654.08. It’s not apocalyptic stuff, but it is a decent market correction.
Currency and bond markets are also finding things tough. The euro had fallen to $1.0953 earlier during Asian market trading, down from $1.1165 on Friday. Like the stock markets, it has since recovered some ground.
The reason for this market reaction?
Greece owes the International Monetary Fund (IMF) rather a lot of money. It has to pay the IMF €1.6bn tomorrow. At the same time, their current bailout package expires.
Talks between Greece and their creditors fell apart over the weekend when the country asked to extend this Tuesday deadline so it could hold a referendum on Sunday.
As a result of the talks collapsing, Greek banks will now remain closed until the referendum on…well, something, we don’t actually know the exact wording yet – takes place on 5th July.
Greece has also imposed capital controls, limiting cash machine withdrawals to €60 (£42) a day. There is no more money going to the banks from the European Central Bank.
The stockmarket in Greece is also closed for the week.
We don’t know what is going to happen next. The markets don’t know what is going to happen next.
Dominic Rossi, Global CIO of Equities at Fidelity Worldwide Investment, said this morning he thinks we are witnessing the maximum level of concern about Greece today.
“Soon though, investors in New York and Beijing will be thinking about more local issues such as the prospect of a Fed rate hike in September and further rate cuts in China.
“These decisions are more likely to have a profound impact on equities than the concluding chapter of a well-documented Greek default.”
Can Greece default on its debt obligations and remain in the Eurozone?
We might find out after tomorrow, or possibly after Sunday if Greek citizens decide to reject the bailout proposals.
What happens then in terms of market impact will depend on how much support Europe offers to its peripheral countries, especially Spain and Italy.
The chances of Spain and Italy defaulting on their own debt obligations and leaving the eurozone are pretty close to zero, which is why I think market reaction this morning to the increased probability of Greece leaving the single currency has been relatively limited.
For investors, any period of market volatility can be a worrying time.
Assuming your portfolio is well diversified (it should be) and is invested with long-term financial objectives in mind (which it also should be), then short-term market events such as these should not prompt any knee-jerk reactions.
Speak to your Financial Planner and get the reassurance you need. Continue to read widely as the crisis unfolds.
But don’t be tempted to believe you can second-guess market movements or accurately time a move to cash (or back into the markets) in order to protect your portfolio from losses and then benefit from gains when the market rebounds.
