Europe and Greece: Is it Over or Just Beginning?

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We have all heard of the recent news in regards to the potential “Grexit” from the Eurozone.  Much of the reports have been very complicated and difficult to understand.  Let’s take the technicality out of what has happened so we can all understand what might happen in the future.  To make it simple, there are three possible scenarios:

  • Greece makes the necessary reforms and things return to normal over the next five years.
  • Investors get spooked, they withdraw their funds, Greece requires a further bailout.
  • Greece is eventually forced to leave the European Union and return to their own currency.

What might surprise you the most is that regardless of where you live, you will be affected be either three of these outcomes. So, let us take a look at each one.

Things go Well

To begin with, this is actually the least likely of all three possibilities. The amount of debt that is owed within the country is massive. Even if they make the necessary reforms, the people will be very unhappy. Investors are not likely to place their funds into such a volatile political climate. While things may return to “normal” for Europe and global investors, the fact of the matter is that the average Greek citizen could suffer as a result. Still, this could be a small price to pay (depending upon your perspective) when compared to an exit from the European Union.

More Money…

Many believe that this is the most probable scenario. Think of Greece as that friend who can never manage his or her own bank account properly. While they may try to make changes, they are somehow always asking for more. If this is the case, the terms and conditions associated with any more loans will be extremely harsh. Bond yields (the cost of borrowing money within Greece) will rise. This could put pressure on the euro as a currency. Its value may fall in relation to the dollar and the pound. Ironically enough, this would be a great opportunity for currency traders to make a quick profit. It is still a fact that jitters would hit the markets around the world. From China to the United States, the repercussions would be felt.

Default

In other words, “goodbye Europe”. Although this may not be as probable, it is still a very real concern. If this occurred, the real danger would be to other fragile economies such as those of Spain, Portugal and Italy. Investors may worry about contagion and in turn, begin withdrawing money from such regions. This could lead to an open-market panic (much like in 2007 and 2008). Trillions would be wiped off of the global markets and the Eurozone’s existence may very well be called into question. The only good news is that Greece would be forced to return to the Drachma. In this case, their own currency would be devalued; making their products an attractive opportunity for outside investors. Some believe that this should have occurred years ago. Although this is debatable, the truth of the matter is that such a situation could sooner or later become a reality.

Of course, we are vastly simplifying things. It is still a fact that the situation in Greece will affect all of us. The next time you take the “out of sight, out of mind” position, remember that the entire world economy is now more interconnected than ever before. What may befall Greece today could be echoed at your doorstep in the not-so-distant future.