The Greece debt default has been a major story in Europe for the past several years and has been a major influence on currency markets and international stock markets. Now that Greece has officially defaulted on its debt, the belief is that the country may be about to exit the European Union. Could the issues surrounding Greece's finances have an impact on your personal finances?
The Value of the Euro Could Go Down Temporarily
One of the major impacts that the Greek default will have is that the strength of the Euro will most likely decline over the short-term. Therefore, if you have large positions in European companies or own Euros, your portfolio is likely to drop in value over the next several days or weeks. However, as there is still a chance that Greece and its creditors will negotiate a new bailout, there is a good chance that it will recover and could even increase in strength over the long-term.
European Companies Will No Longer Have a Weak Euro to Bolster Profits
One reason why countries such as Germany needed to keep Greece in the EU was because its tattered economy was acting as a drag on the Euro. While this may not seem like a good thing, a cheap Euro as well as perceived weakness in Europe's overall economic strength made it easier to get money almost for free. In some cases, central banks were actually being paid to hold currency as effective interest rates were in negative territory.
As the value of the Euro rises and interest rates potentially rise, companies throughout the EU may see diminished profits. This is because consumers in other countries will pay higher prices for European goods and will see their purchasing power diminish accordingly. Additionally, these businesses will have to pay more to service their debt or to acquire new debt that may be used to build factories or buy raw materials.
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A Greek Default Could Put a Spotlight on Other Heavily Indebted Nations
If Greece does ultimately default, other countries that are struggling to pay back their debts could come into the spotlight. Puerto Rico recently made the news after it announced that it would struggle to repay its current debt obligations in a timely manner. Although the two situations may not necessarily be connected, there is only so much money that creditors can loan and only so much that central banks can do to spur economic growth.
These factors may weigh heavily on investors who may start to wonder about the health of the global economy going forward. While logic may dictate that what happens in Greece shouldn't have an impact on America, the global economy is tightly connected in the 21st century. You also have to consider that the direction of the market is partially based on human emotion. There are times when stock markets go up despite bad news merely because investors think that such news is simply a fluke or will be overcome by good news shortly.
However, if investors start to think that there is real weakness in a market or collection of markets, they may look to put their money elsewhere. For investors who have their money invested in American or European stock markets, it may be time to look toward gold or government bonds that are generally safe havens when a bear market develops.
Long-Term Investors May Have Nothing to Worry About
If you are a long-term investor, you probably have nothing to worry about when it comes to your finances in the long run. While you may take a hit in the next few weeks or months, it may present you with a great opportunity to buy low and reap the rewards later on. Assuming that any market downturn is a short one, you can buy on the dips and increase your profit potential over the next few years. For those who are invested in American index funds, it is important to know that the average market return is 7 to 11 percent annually even when recessions and other market downturns are factored in.
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Greek Investments Could Offer Even Higher Returns
For those who are not risk adverse, it may be a good idea to put your money into Greek companies or Greek bonds over the next few months. If the Greek government comes to an agreement with its creditors, it can remove capital controls and regain liquidity, which should allow business to operate as close to normal as possible. Despite the overall economic weakness that Greece is experiencing, responsible reforms could help the economy grow at at a rate that mature economies in Europe and America could only dream of. Just like buying a growth stock before it takes off could result in 100 percent gains in just a few months, the same may be possible for those who invest in Greece.
The Overall Effect on Your Finances Depends Mostly on Your Timeline
For most, the weakness in Greece is going to have an impact on their 401k plans if they are heavily invested in European stocks or indices. Fortunately, most plans only devote a small portion of their holdings to anything other than American large cap companies. Therefore, once the U.S stock market recovers, you should be alright from a financial standpoint. If you are under the age of 50, this will be nothing more than another blip on the path to retirement. If you are closer to retirement age, the story in Greece may be warning to start migrating toward a more conservative portfolio that preserves your capital.
The Greek default is going to have major effects on the European markets as well as the American market. However, these effects will likely be of the short-term variety, which means that you don't need to worry about losing all of your money overnight. Those who are truly concerned about how this situation may impact their finances may wish to consult with a financial planner who can help create a suitable plan for their portfolio.
