You may be concerned with the events unfolding in Europe, specifically the Greek financial crisis and what this might mean for the whole of Europe, not just other financially weak countries (Spain, Portugal, Ireland and Italy). While the €750 billion package announced by European finance ministers appears to have allayed the market’s worst short-term fears, the eurozone still faces a number of long-term challenges; cuts to government spending and lower economic growth. The purpose of this article is to help make sense of current financial events and offer some guarded guidance for the future.

The cause of the Global Financial Crisis was fundamentally an excess of debt in the private sector of the economy caused by interest rates kept too low for too long. When you combine too much debt (much of it was lent to people and companies that had little hope of making their repayments if they ever hit a rough patch) with debt securities even the smartest people couldn’t understand, well there’s a recipe for a financial crisis. When the crisis did happen governments around the world did two things. Firstly, they took on the bad private debt of troubled institutions (those that were “too big to fail”) and made the governments responsible for them. This was needed to make sure that the financial system continued to operate in as normal a way as possible. Secondly, they promised that the financial system would be better regulated in the future so that the financial crisis would not happen again (we are still waiting on this one).

The current situation has a direct linkage with these events. Greece spent up big when interest rates were low and the government thought economic growth would go on forever (thereby paying back the debt from a smaller proportion of future income). They also hid debt with somewhat dodgy accounting procedures. Now that economic growth is much weaker throughout the developed world, they won’t have a bigger economy to pay back the debt. In fact, the proportion of the economy that will be needed to pay back the debt is so big that it will, in fact, slow the economy, because of the higher cost of borrowing.

These are the austerity measures some of the Greek population was rioting about. No wonder they are upset. The people in power want to stay that way and the population wants to know why they should suffer for the excesses of the rich and powerful. Meanwhile the Germans are wondering why they should help out people who don’t pay their taxes and don’t stay at work all day…

The question is how do these events affect financial markets, and your financial assets? What Greece does is remind investors that the consequences of the financial crisis are still being worked out. Those countries and companies that are weakest in terms of their balance sheets and their incomes will be most vulnerable. What we try to do with your portfolio is to provide a range of financial assets, diversified across different asset classes, world regions and industries. We don’t intend to panic, or predict the future. What we do aim to do is keep you invested and aware of what is going on in the world and how it affects you and your finances. We hope this article has helped.

If you have any further questions, please contact us at Argentis on 07 3249 8900.