An update from the Sterling Investment Committee
Should We Be Worried?
The short answer to that question is no, not us here in the US. Should Greece be worried? Absolutely. But what does all this news actually mean? Here are a few tidbits about what is going on…
Let’s figure out why Greece is in this situation in the first place and why such a small country even matters. The Eurozone (countries part of the European that use the Euro) and European Central Bank acts like the US Federal Government, uniting many countries (states) under one monetary policy,or banking system. The main difference is that other than currency, each country is entirely independent. That means that Greece alone decides how to spend its tax dollars, and there is no exchange of tax dollars between countries when the need arises.
This is different from in the US. For example, when one state requests FEMA dollars, the federal government appropriates funds from all states to the one state in need. The Eurozone was built without the power to automatically appropriate funds to different countries, so without an automatic bailout mechanism, Greece is on its own.
For years Greece has been outspending its budget, collecting too few tax dollars, and it is now unable to repay loans provided by the other Eurozone countries. Recently, the banks have demanded Greece pay back the loans by reducing their spending through austerity measures (i.e., budget cuts). Greece does not want to do this and could leave the Euro as a result.
Even though Greece is so small, no country has ever left the Eurozone before so the long-term consequences are unknown. First, all Eurozone government bonds would be need to be re-priced to account for this new risk of another country leaving in the future and defaulting. Next, this could open the door for other struggling Eurozone countries like Spain and Italy to default.
Greece recently voted (on July 5th, 2015) on whether or not to accept terms of a bailout. The vote essentially would determine whether or not Greece would stay in the Eurozone. The referendum was expected to pass (Greece stays on Euro/pays back loans), but the opposite actually happened. Greece voted “no” to the bailout, a surprise from the original polls.
In the grand scheme of things, let’s put this media giant in to perspective. Yes, the US stock market has been and likely will continue to be more volatile over a potential default in Greece. But, for the typical buy and hold investors, the fundamentals have not changed as it relates to the companies associated with the US or even foreign stock markets. And, to even further put things in to perspective, the Eurozone is an economic and monetary union of 19 countries of which Greece makes up 2% of the Eurozone GDP – a very small sliver when looking at the entire world of investing.
Steve Finkelstein, CFP®, Megan Gehrman, CFP®, and Amelia Gieschen, CFS, are members of the Sterling Investment Committee. To read more about our long-term investment philosophy and more about Sterling, visit our other blog articles.
Submitted by Sterling Retirement Resources, Inc. on July 8th, 2015