It is finally coming to a point of capitulation. After months of talk and concerns, on top of similar talk and concerns a few years ago, it appears that the Eurozone and Greece may have finally hit a breaking point. Greece has been denied emergency funding and it seems they will be defaulting on a loan from the IMF while banks have been closed and supply of medicine could also be at risk. The Greek government has also called for a referendum, a decision in our view that largely looks to be a cop-out from a government when it is faced with a tough decision, on whether a proposed package should be accepted by Greece. While things sound bad, some context can go a long way so we wanted to outline a few areas that investors should be watching and others that we view as less important.

What not to worry about:

Greece by the numbers: At the end of the day, from a global investors standpoint, Greece in not a substantial part of the markets. With a GDP of $247 billion and population of 10.9 million, the exit of Greece is not going to bring Europe or the global economy to its knees. For comparison, Canada (our great country that is still pretty small in the scheme of things) has a GDP of $1.77 trillion and a population of 34.7 million. Germany has a GDP of $3.6 trillion and a population of 81.2 million. This is not to overlook the seriousness of the situation in Greece or the fact that these are individual people in a very tough situation, it is just to point out that from an investment standpoint, Greece really should not be impacting any long term investing goals or strategies.   

A ‘Grexit’ occurs: This is a bit of a nuanced point, but we do not think the issue is whether or not Greece actually exits the Eurozone but what happens after that. The economy in Greece is in a tough spot and it is more than likely that they will need to swallow some tough medicine at some point in the future. Being part of the Eurozone, or not, does not change this problem. Greece will still be Greece in and out of the Euro. We do not think an exit should really be the focal point; the real worry in our view is what happens down the road.

Declining Canadian Markets: We always try to think longer term and in this case it is no different. As long as you have a time horizon outside of a year, we would not be overly concerned with market movements due to news with Greece. In 2014, Canada did $303 million in trade with Greece so even if that trade were to cease completely; it is hard to imagine an overly material and long-term impact on the Canadian economy.

What to worry about:

Contagion effect: This is the real concern amongst investors, the fear that when Greece exits others will follow. We think this fear has two sides to it. The concern being that if Greece is able to successfully separate from the Euro, others will follow and diminish the influence of the Eurozone. There could also be a bit of a domino effect amongst lenders who have loans outstanding with defaulting parties. This could be an issue but going back to the initial point of the Greek economy being fairly small, we have a hard time believing that Greece will set off a wave of defaults across Europe. We think the longer game is where the risks lie here. We highly doubt other Eurozone members will see a Greek exit and then make a snap judgment to do the same in the next week or month. Instead, countries will likely be watching Greece and see how it adapts to not being part of the Eurozone over two, three or five years. If Greece emerges from the Eurozone in a better position over the longer term, then we think there is a real risk of others leaving the Euro, but for now we think most will wait and watch how things work out.

There is a lot of talk surrounding Greece and the story is not done yet. There could still be a last minute agreement or kick of the can. Regardless of what happens, it is important that investors keep their eye on the ‘ball’.  While it is a string of events worth watching, in most cases, it is likely not something where investors would need to adjust any long term allocations or investment strategies.