How will the political and economic turmoil in Greece affect the rest of Europe and the financial markets? What can you do to shield your investment portfolio?
Greece is on a slippery slope.
It has missed a payment to the International Monetary Fund and is in seriously of defaulting.
Next month, banks and hedge funds will be asking the country for their money. If Greece’s pockets are empty, the reverberations could be felt across the EU.
What’s happened with Greek debt?
Greece has borrowed a lot of money from multiple sources over the last few years in an attempt to pay down the national debt as their economy slowed during the global financial crisis.
Deep budget cuts were part of the conditions imposed on Athens by its European creditors. These restraints have prevented any further economic growth and the country’s financial situation has only worsened. Greece now needs more money just to cover its debts – and it’s looking at the Eurozone to pay.
If Europe stumps up the money, it will want to ensure more austerity measures are imposed on Greece in an effort to reduce the country’s overall deficit.
Today (Sunday July 5th), Greeks will decide whether they accept the EU’s financial rules in return for bailout money.
A ‘yes’ vote would like continue this scenario, with the debts paid, but the country’s economy squeezed further.
Greek Prime Minister Alex Tsipras is advocating a ‘no’ vote in the referendum. He believes this would put the country in a stronger position to negotiate better bail out terms with European finance ministers.
This outcome would result in no new austerity cuts, but no money to pay the debts and Greece would default. A Greek exit from the Eurozone – or a Grexit – would then happen, leaving the country to look for a new currency, or return to the Drachma.
If this were to happen, the future of Greece’s banks would be totally up in the air and nobody really knows where the financial dominoes would stop falling.
Equities are already feeling the effects of the uncertainty. On Monday last week, every major global market slid: the US benchmark S&P 500 Index dropped 1.1%; China’s Shanghai Composite Index fell 3.3% and the FTSE 100 lost 2%.
Will Greek uncertainty extend to the UK property market?
UK property has become somewhat of a safehaven asset. Investors are turning to British bricks and mortar and shunning the likes of gold and the Swiss franc. It’s unlikely Greek waves will spread so far across Europe, buy the mortgage market is already feeling ripples.
Banks take savers’ money and lend it to borrowers. But the hazy definition of savers and borrowers is where the uncertainty comes into play. Banks boost their profits by borrow money among themselves. Variable rates are linked to the Libor, while fixed rates are linked to swap rates.
These peg rates are determined by the banks’ confidence in the financial system and each other. Swap rates are also dependent on both the UK base rate and gilt yields.
If Greece does default and a political contagion spreads panic across the Eurozone, gilt yields and market rates could spike. British banks would then be under pressure introduce higher rates on new mortgages or even increase standard variable rates.
But it’s not as clear cut as that.
If European markets are merely rattled without the contagion effect, international investors will invest even more money in the stable UK market and gilt yields – and therefore mortgage costs – will likely fall.
So what can investors do?
Shares set to experience the biggest are travel operators such as the FTSE 100-listed Tui and Thomas Cook.
Marks & Spencer has a 28-store strong presence in Greece so over the last week shares have fallen from 570p to 545p.
HSBC has over $6 billion worth of assets in Greece and is the most exposed of all the large European banks.
If you have an equity-heavy portfolio you may want to make that UK property investment before prices rise – that’s exactly what more affluent Greeks are currently doing. The safehaven British property is being used as a hedge against the effects that a return to the drachma would have on