What the Collapse of Greece Means for Your Portfolio

It's starting to seem like there's a better chance of Mark Zuckerberg ditching hoodies than Greece avoiding default.

In some respects though, the strange thing about the Greek default hoopla is the way we seem to have forgotten that sovereign defaults aren't all that unusual. Between 1998 and 2004, Russia, Argentina, Ecuador, Indonesia, and Pakistan -- among others -- all defaulted. Ukraine defaulted twice.

Going back to the early 1800s, Austria has defaulted a few times, Germany and Italy have both defaulted, Spain has a couple to its name, and Turkey has a whole bunch of marks on its record. Greece has also had a pair of defaults.

I'm hardly looking to minimize the impact of a Greek default, particularly when it comes to the Greek economy in particular. Unavailability of financing will only exacerbate the problems that already exist there and sorting that out while also managing a messy currency transition would create an ugly scene.

But will this make for an apocalyptic scenario in the big picture? Simon Johnson has a piece on Huffington Post titled "The End of the Euro: A Survivor's Guide." Societe Generale has suggested a "disorderly" Greek exit could cut the Euro STOXX 50 in half.

Investors certainly seem concerned. The Dow Jones (INDEX: ^DJI  ) had dropped nearly 7% from early to mid-May largely on these eurozone concerns. The S&P 500 (INDEX: ^GSPC  ) fell closer to 8% over the same period -- a drop that rounds to nearly $1 trillion in value. That would suggest that global contagion will be pretty severe.

And even when we're talking about the Euro STOXX 50, we're talking about huge global companies like Anheuser-Busch (NYSE: BUD  ) , ArcelorMittal (NYSE: MT  ) , and Unilever (NYSE: UL  ) that have at least as much, if not more, exposure to markets outside of Europe than in Europe itself. Business in Greece in particular is mostly a rounding error for companies like these.

Predicting the outcome of an event like this is wrought with challenges -- the primary one being that we're talking about forecasting the future. But if we step back and think about what this all means for the long term, would a Greek default be an event of cataclysmic proportions or just another sovereign default to throw up on the board with the collection of many other historical sovereign defaults?

The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Unilever. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of ArcelorMittal, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (8) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2012, at 11:46 AM, TheNitWit wrote:

    Zuckerberg should buy Greece and turn it into a theme park while he still has the cash. Nice beaches, add a few zip lines. Done.

  • Report this Comment On May 29, 2012, at 1:36 PM, ryanalexanderson wrote:

    Hi Matt,

    I think the issue is a two step one:

    1) European banks have next to no capital reserves, and leverage up to 40:1. So a good stiff breeze could destabilize them, let alone multiple sovereign defaults on their balance sheets.

    2) The scary level of derivatives in the hundreds of trillions between all banks and clearing houses in the world are unprecedented in history, and exacerbated by current ZIRP policy (it's the only place a bank can chase meaningful yield).

    Neither one of these statements applied to developing country defaults or Europe in the 1800's. That's the difference.

  • Report this Comment On May 29, 2012, at 3:59 PM, TMFKopp wrote:

    @ryanalexanderson

    They're good points and I think you're definitely right at least as far as what markets/investors are looking at and being frightened by.

    But I still wonder what the reality is versus the perception. With the exception of Deutsche, the major European banks are levered at anywhere near the 40:1 rate. And while the notional value of derivatives may be in the hundreds of trillions, the actual impact value of what's out there isn't nearly that.

    I've just got this sneaking suspicion that reality has been trumped by perception here. In the classic style of "this time it's different", anyone arguing worldwide calamity and collapse from one or even a couple European defaults would be essentially saying just that.

    Matt

  • Report this Comment On May 29, 2012, at 5:36 PM, dag154 wrote:

    270 billion in government debt, a synchronized colapse of all Greek banks and bankrupcy of thousands of small to middle sized companies ...

    There will be blood ... (for a wile at least)

  • Report this Comment On May 29, 2012, at 5:40 PM, neamakri wrote:

    First, keep us Fools informed on the Greek issues. Thanks.

    Second; my opinion is that Greece has such a small GDP (~$312B in 2011) that the actual effects should be small.

    Third, I empathize with the Greek people, but they did put themselves in this spot. By the way, my username "neamakri" means "new market" in Greek.

    Last, I think that a renegotiation of (Greek) austerity terms could be worked out to everyone's benefit. For a dozen years they have run large deficit spending, and to tell them to immediately balance the budget is just not going to work. They need to gradually work to that end, just not all at one. ~my opinion ~

  • Report this Comment On May 29, 2012, at 6:50 PM, whatevmatil wrote:

    Your question made me think of the following infographic I saw awhile back: http://graphics.thomsonreuters.com/F/09/EUROZONE_REPORT2.htm... (click "Bank exposures map" on the left hand side). This tells me that the whole situation is more complicated than anyone understands and that it is all interconnected. A Greek default might create problems for not only the Greek debt holders, but perhaps for the debt holders of the debt holders as well. A Greek default ONLY might be similar to other historical defaults, but depending on how it goes, it might psych everyone out on the rest of the PIIGS when everyone realizes there are other, larger countries heading in the same direction. The fact that Greece is a small part of a larger problem is what makes it possbily different in my mind. That is how I think about the situation anyway, I have no idea if it will end with a bang or a whimper.

  • Report this Comment On May 29, 2012, at 7:07 PM, TMFKopp wrote:

    @whatevmatil

    Great point, but as far as I know, defaults usually take place in the context of broader economic stresses. I think it'd actually be pretty unusual for a country to default while economic conditions are gangbusters everywhere else.

    Also, while interconnection is an important theme, and one that I still think is very worrisome in the context of US TBTF banks, when there's a sovereign default, there's always somebody else on the other end of that default. That the spidering out is broader these days may actually be a good thing as it would mean that you don't have a financial nuke going off in a few select spots, but rather smaller landmines going off over a broad area.

    But hey, I'm not trying to come off as a blind optimist on this one. Rather, I'm thinking some perspective is due here -- cataclysm seems to be the default view, but I think it's far more fuzzy.

    Matt

  • Report this Comment On May 29, 2012, at 10:04 PM, CoreAndExplore wrote:

    Any default by Greece would cause rates on the other PIIGS nations' debt to go up in sympathy, increasing the costs of servicing that debt to astronomical levels. Spain, for example, currently has to pay well over 6% on its 10-year notes, and could feasibly see that double, at least for a time, if Greece were to collapse.

    None of the PIIGS really have any margin for error, so if the bond markets punish them further out of fear, then there might be a kind of domino effect. I honestly think that the ECB and IMF should be focusing on building a firewall of sorts, and shoring up Spain's intermediate term financing first, since that's the largest economy among the troubled nations.

    Given the huge unemployment rate, political chaos, and fiscal shenanigans, I think Greece is more or less a lost cause. Throwing money at that problem is just a waste. Spain and Italy, however, have a better shot at at least stabilizing their situations, but need would more capital injections. I liken Greece to a tumor that someone is trying to heal with prednisone and other remedies - rather than try to become whole again, it makes more sense to remove the cancer and protect the healthy tissue (which is of course relative in this case). Of course, that would be a nightmare politically, and may even threaten the integrity of the entire EU. Basically, there doesn't appear to be any truly good solution to this mess at the moment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1897075, ~/Articles/ArticleHandler.aspx, 10/1/2014 10:35:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement