That’s Oh No! (pronounced OH-Hee) in Greek.

 

On Tuesday this week, Greece failed to meet their June 30th debt obligation to the International Monetary Fund (IMF) – which came as no surprise based on Prime Minster Alexis Tsipras’ proposed referendum for this coming Sunday, July 5th (ahem, after the deadline) asking citizens to vote on whether the Greek government should accept or reject its creditors’ latest bailout package.

 

Greece has been front and centre in the financial news for a couple of months now – and in the background for the past 4 years – and still no resolution. It’s doubtful that the results of this Sunday’s referendum will necessarily make things any clearer – but they will undoubtedly give the market another shake based on investor and media reactions – so try not to quiver as much when it does happen as any market volatility will likely be short-lived while Greece’s state of affairs could continue for much longer.

 

So here we have it, the Greek people will determine on Sunday whether to take a bailout deal from their creditors in exchange for more belt-tightening reforms. Polls conducted by Bloomberg suggest the outcome of the referendum is too close to call, with 42.5% intending to vote “Yes” to accept the conditions tied to a bailout and 43% backing the “No” camp to discard more austerity demands. Tsipras is urging Greek citizens to vote “No” in order to give him more leverage to renegotiate a better aid package for the nation – shedding a brighter light on how bad Greek public finances had deteriorated under his leadership, said the IMF in a report released yesterday warning that Greece needs more than €60bn in new aid over the next three years and a doubling of maturities on its debt from 20 to 40 years.

 

So, should you be worried?

 

Not really. In order to become something worse than a correction, in our view, global credit conditions would have to deteriorate sufficiently to usher in a renewed global economic downturn. In particular, the U.S., Canada, the U.K., Germany, and the other core developed economies of the eurozone would have to be heading toward recession brought on by a sudden tightening of credit conditions.
We believe this is unlikely. Central banks are accommodative and commercial banks are in much better shape than they have been in many years. Eurozone banks raised large amounts of new capital last year. And in December, the results of the European Central Bank’s stress test revealed that all but a handful were in a position to withstand much greater turmoil than any Greek outcome is likely to deliver.

 

Unlike Lehman Brothers, whose debt obligations were spread throughout the financial system, about 80% of Greek debt is concentrated in the hands of eurozone central banks and the International Monetary Fund. Of the 20% in the hands of the private sector, a substantial piece is held by Greek banks, almost nothing by foreign banks.

 

Getting Past Greece

We expect this pullback will eventually give way to a resumption of the long-term uptrend that we think has longer to run on the back of strengthening economies in North America and in most of Europe. In the near term, I’ll be reviewing your portfolios and ensure that equity exposure is strategically enforced in their target weights – the key to disciplined asset allocation and rebalancing. Some cash on hand could prove valuable in the event that markets over-correct – so don’t be surprised if I call you about an opportunity or two in the near future…

 

Now, I’m off to Cambridge for the weekend to celebrate the upcoming nuptials of my very good friends Kyle and Julia who are getting married! Word about my awesome MC skills must have spread because I have the privilege once again of (hopefully) making everyone laugh as their MC - congrats you crazy kids!