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.