The Eurozone crisis has been dominating the news in recent months, and as European leaders from France, Germany, Italy and Spain meet in Rome to hold talks on the Euro, many of you may have concerns. We thought this would be a useful explanation of where things stand.
• Greece is a very small economy. According to an IMF list of the world’s economies ranked by size (GDP in purchasing power parity terms) it is 42nd.
• Greece’s public debt is large at around 160% of GDP. Athens has received a total of US$300 billion in bailouts from the IMF and the EU (the equivalent of the GDP of the United Arab Emirates). The latest US$160 billion payment on the condition of imposing austerity measures to reduce debt to 120.5% of GDP by 2020.
• In March, Greece avoided an uncontrolled default on its obligations by agreeing to a bond swap with private creditors. But after five years of recession there does not appear to be much public support for further cutbacks. Amid this backlash, national elections on May 6 failed to yield a definitive outcome.
• On June 17 the two largest pro-bailout parties won enough seats to form a parliamentary majority. This provided some immediate reassurance to markets. The incoming government still has to convince official party lenders of its capacity to push through required reforms before securing further bailout funding.
• EU governments have indicated they are willing to ease terms if a new government swiftly emerges
• Central bank officials from leading developed economies say they are standing by to flood the financial system with cash if there is any credit squeeze. Bad news for those looking to purchase an annuity, as this brings rates even further down.
The unknowns:
• Whether Greece will hold on and stay in the euro
• Whether European policymakers manage to hold the single currency together beyond this
• Whether a smaller currency union with France, Germany, Italy and Spain might emerge
• The process that will take us to one of these outcomes
The knowns:
• The benefits of remaining calm and disciplined
• Basing investment decisions on forecasts is counter-productive – something even more true in such a rapidly developing and multi-stranded story.
• Those nearing retirement must be particularly careful.