Greece DebtSubmitted by Grunden Financial Advisory, Inc on June 2nd, 2010
There have been more news stories written about Greece in the past month than in the entire 2009 year. No doubt, the Greece debt crisis is the main source of these stories.
Government spending in Greece has ballooned over the decade. Profligate spending fueled by easy money caught the Greeks off guard during the recent financial crisis. It was ultimately revealed that the debt levels and deficits set by the European Union (EU) had been exceeded. The situation has become dire for the Greeks. Total national debt is currently larger than their gross domestic product. Consequently, the credit rating for the country has been downgraded which aggravates their financial problems. The government has promised deep cuts and austerity measures that begin to correct the problem. Additionally, the EU and the International Monetary Fund have pledged €750 billion ($930 billion) in loans and credits if needed by the Greek government. And if Greece operated in a vacuum then that would probably be the end of the issue. Unfortunately, the concern is the uncertainty of a financial contagion and the effects that would have on the global economy. There is growing concern that Portugal, Ireland, Spain and perhaps Italy could be the next to suffer Greece’s fate.
The markets deplore uncertainty. This has led to large market swings similar to what we experienced during the financial crisis in 2008-09. Those swings create concern among investors that may test their resolve to remain invested in the U.S. and world economy. We must expect and be able to tolerate, both psychologically and financially, the marketplace volatility as long-term investors. Without risk (volatility), we don’t have the chance to generate returns above the “risk free” rate of return (commonly referred to as a three-month US Treasury bill). How much risk an investor needs to take is contingent on their need for risk, ability to take risk, and willingness to take risk.
To discuss further your need, ability, and willingness to take risk, please don’t hesitate to give us a call.