Greece dominates the global headlines right now, and for good reason. While Greece is a small country, its huge debt balances have forced the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB) — the three collectively known as “the troika” — to repeatedly save it from defaulting on its debt payments in recent years in an effort to save the integrity of the European Union.
Negotiations between Greece and its creditors have ramped up in intensity all year as debt payments are due by the end of June — by almost all accounts an impossible financial burden for the Greek government to pay. Scrambling to buy themselves more time to hammer out a deal, Athens used a loophole to delay a €3.5b debt payment to the ECB due mid-month back to June 30th… today. At the time of this writing, no deal has materialized, and now Greece is yet again on the verge of default.
The most recent major developments started this past Friday and continued over the weekend. On Friday, Greek Prime Minister Tsipras surprisingly called for an emergency referendum of the Greek people to either accept or reject the last bailout package offered by Greece’s creditors. Then, over the weekend, Athens announced that there would be a “Greek Bank Holiday” through July 6th. These news items have roiled the world’s capital markets over the past few days. Even ordinary investors know that when a country’s government closes teetering banks and declares a “bank holiday”, that it’s an ominous sign.
Frankly speaking, it will be impossible for Greece to ever pay off its debts, no matter how the payments are structured. This means a Greek default is inevitable in the long run.
So what does that mean for the here and now? Know this: Capital markets hate uncertainty. Uncertainty broadens the spectrum of anticipated outcomes, meaning increasing risk and volatility. These conditions cause investors to get nervous, meaning more of them make the decision to “sit this one out” and they sell, which drives down the prices of risk assets like stocks, and some bonds too, at least temporarily.