Since the Global Financial Crisis (GFC), the International Monetary Fund (IMF) has lent huge sums of money to Greece so it can continue to operate a solvent economy. Without this financial aid, Greece would be unable to pay its bills and it would certainly have been forced to exit the European Union (EU).

In order for Greece to continue receiving financial assistance from the IMF, it is required to make repayments along the way. Furthermore, the IMF requires Greece to undertake certain cost cutting (austerity) measures in order to re-build its economy and allow it to meet its debt repayments. Such measures are being protested by the Greek people.

The financial crisis in Greece has gained a lot of media traction recently as it is likely to miss a repayment, due on 30 June. The Greek Government has refused to accept the further austerity measures put to them, which would guarantee ongoing financial assistance. Instead, the Greek Prime Minister, Alexis Tsipras, has called a referendum on the measures.

The IMF is holding very firm, stating that if Greece defaults on June 30, the July 5 referendum becomes irrelevant because the people will vote on austerity measures and assistance that will be legally invalid.

As a result, there is now a possibility that Greece will be thrown out of the EU.

What does the financial crisis in Greece mean for the wider economy?

During the GFC there was concern that if Greece fell, it would result in a domino effect on other countries experiencing financial hardship, including Italy and Spain. However, now Italy and Spain are economically much stronger than Greece.

Greece makes up less than one percent of the world’s economy, so a Greek catastrophe alone would not have much of an impact on other markets.

What does the crisis mean for clients of Hewison Private Wealth?

Similarly to what we have seen today, global sharemarkets react for fear of the unknown. Hewison Private Wealth understands the importance of not overreacting around short term, emotional and irrational sharemarket volatility.

During our recent visit to the Berkshire Hathaway annual general meeting, chair Warren Buffet re-iterated his view on investing, which is appropriate to draw on in this situation;

 “It is impossible to predict the outcome of macro-economic issues or market trends. Successful long term investing involves choosing to invest in quality companies with strong cash flow that appear undervalued. These companies are often easier to find during volatile markets when others are making short term, emotional investment decisions to sell.”