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Global markets

Sovereign Defaults part of our global DNA

Nathan Lear
Partner/Private Client Adviser
12 Feb 2012

We continue to hear that European countries are on the verge of sovereign debt default – Spain, Portugal, Italy and Ireland to name a few, and of course more recently, Greece. Will this spell the end of the financial world as we know it? It seems almost every day we wake up to a new bout of European sovereign debt fears.

We must however, not forget that events such as the current European debt crisis are nothing new. The world has seen sovereign defaults before and will see them again.

If we look back through history, sovereign defaults have been happening for centuries. For example, Europe in the early 1800’s following the Napoleonic wars. Or more recently in Argentina, which came to a head in 2002. From the late 1970’s Argentina, under the control of a military dictatorship, began accumulating huge debt that it ultimately would not be able to repay.

Debt defaults usually arise as a result of a giant credit bubble, where countries or governments run up debt to unsustainable levels. This may be from wars, social unrest or simply poor financial and economic management.  

Although we keep hearing that “this time is different”. Words such as “contagion” are thrown around which lead us to believe that the situation is much worse than any other crisis the world has experienced in years gone by. However, it’s no different.

There is no denying that if a European country was to default on its debt that it would cause ripples throughout global financial markets, in particular Europe. If a country such as Greece was to default it would have devastating long term consequences on that country. Many believe that Greece is already heading down that path.

The world will recover, it always does. In many years we will look back upon this as merely a blip in the radar of the evolutionary path of economics.

With fear driving markets to historically low levels, how can one position their portfolio to avoid the consequences of a possible European default?

Diversification is paramount, along with investing in quality assets. Ultimately, when the market recovers it will recover quickly and only those invested will be able take part in the upside.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.