Written by Mark Govoni
This past Sunday Greek voters rejected the bailout terms issued by their international creditors. While this does not mean that Greece will exit the Euro, it does increase the odds that it may occur. The current situation is as follows: Greece owes €3.5 billion to the European Central Bank (ECB) payable on July 20, Greece is in arrears €1.5 billion to the International Monetary Fund (IMF) and, most damaging, Greek banks are running out of money. On Monday the ECB made it more difficult for Greek banks to access emergency funds, further stressing an already cash starved citizenry. Additional currency controls could be in the offing, up to and including the issuance of IOU’s.
Global markets seemed to take the Greek vote in stride. Some European periphery markets saw interest rates rise a bit but, on the whole, stock and bond trading was orderly. We do not believe that the Greek problem will spread beyond its own borders. By any standards, the Greek economy is tiny, accounting for only 2% of European GDP. Furthermore, the international community has had a number of years to exit its Greek holdings, leaving foreign investors and their banks holding few Greek assets.
We continue to believe that we are in the middle to late stages of a bull market. Certainly, headwinds do exist which will continue to increase volatility. As long term investors however, we believe that staying the course is the best prescription. The Greek situation will end. We cannot tell you if Greece will remain in the Euro or exit it completely. We do believe that the Euro will be a stronger currency without Greece and that the European Central Bank is likely to ease dramatically should a Grexit occur. In any event, we feel that the global economy is sufficiently sound to weather the Greek crisis. We remain overweight stocks and have begun to add some lower correlated assets to portfolios. We view near term volatility as an opportunity to add to attractive assets.
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