How Europe Affects Your Portolio?

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OR … It’s All Greek to Me!

By Sean G. Todd, Esq., M. Tax, CFP®, CPA

When a possible default on Greek sovereign debt becomes headline news, a lot of doctors find themselves wondering, “How can the problems of a country so small and so far away create such turmoil in the world’s financial markets?”

Well, what’s happening in Europe is probably affecting your portfolio right now, regardless of the quality of your holdings or how well diversified you are; or think you are.

Bank exposure

One of the chief concerns about the possibility of default on sovereign debt has to do with the financial stability of banks that hold it.

For example, some of the largest French banks have already seen their credit ratings downgraded because of their extensive holdings of debt from troubled European countries. If a Greek default made banks reluctant to lend to one another, that could affect credit markets worldwide.

American banks hold very little Greek debt compared to European banks; however, they could face a different challenge. Derivatives known as credit default swaps can create a ripple effect, multiplying a default’s impact beyond the bondholders to other financial institutions and institutional investors. US financial institutions are major issuers of credit default swaps, and the potential impact that a Greek default would have is unclear.

However, since the 2008 financial crisis, banks have been forced to hold greater capital reserves to deal with contingencies.

Potential for tighter credit creating recession

Lending worldwide hasn’t fully recovered from the last financial crisis, and has helped keep global economic recovery sluggish. If banks’ lending ability were impaired further by a financial crisis brought on by a default on sovereign debt, pessimists argue that a slowing global economy could be thrown into recession. Europe represents a major market for many US companies, and a recession there would be felt around the globe.

Greece could be the tip of the iceberg

Even though Greece is the immediate concern, Europe’s larger economies could pose a bigger threat. Italy and Spain both face debt and deficit problems. Italy’s economy is more than five times that of Greece; Spain’s is more than four times bigger (CIA World Factbook 2011). If a Greek default would have a ripple effect, default bySpain or Italycould create waves.

To compound the problem, borrowing costs for troubled countries have risen. At recent auctions, nervous investors have demanded higher interest rates to compensate them for their higher perceived risk. As any credit card holder knows, having to pay a higher interest rate makes paying off debt and balancing the budget more difficult.

All politics is local

Recently there have been signs that voters in stronger European countries, such as Germany, may be questioning why they should continue to support others when their own economies are slowing. Also, investors worry that the financial support available from the European Financial Stability Fund (EFSF) may not be sufficient or available quickly enough to avert problems. Though there’s no shortage of suggestions for how to deal with the situation–issuance of euro bonds backed by all Eurozone members, leveraging the EFSF’s existing assets, greater fiscal integration among countries, Greece abandoning the euro–questions about the ability and willingness of other eurozone countries to support weaker members have contributed to physician … and all investors … anxiety.


Doctors – like financial markets – hate diagnostic and treatment uncertainty, and the situation has contributed to the recent volatility across a variety of asset classes. However, Eurozone leaders have the benefit of having watched the United Statesduring the 2008 crisis. Also, they have generally reaffirmed their determination to defend the euro.


Despite the above, remember that uncertainty about Europe could persist for months, so while it’s important to monitor the situation, don’t let every twist and turn derail a carefully constructed investment game plan.

To determine how market events might affect your own portfolio, don’t hesitate to ask questions and get expert help, prn.


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4 Responses

  1. Is the Greek haircut really a default?

    Here is an essay by Michale Zhuang on the news that the Europeans, Germans mostly, have finally hammered out a deal with Greece, which now only needs to pay 50% of what it owes to private lenders (mostly German banks). German Chancellor Angela Merkel called it a 50% “haircut” and world markets cheered yesterday rallying 2% to 6%.

    But, wait a minute, how is it different from a Greek default? Is the market dumb or not?



  2. Is Southern Europe’s Debt Crisis an Omen for US Health Care?

    Stewart – David E. Williams just noted in The Wall Street Journal (Pain for Europe’s Smaller Drug Firms) that Spain, Greece, and Italy are putting the squeeze on drug makers as part of national austerity programs designed to ease the debt crisis.

    Companies like Almirall and Alapis that depend heavily on those markets are suffering mightily as national health systems cut reimbursements. There’s less appetite for cuts to hospitals and physicians, and none for taking away coverage.



  3. Economist who foresaw ’08 crash warns conflict with Iran could cause global recession

    [Professor known as ‘Dr. Doom’ also predicts joblessness in US will remain high in 2012]

    Economist Nouriel Roubini, nicknamed “Dr. Doom” for his gloomy predictions in the run-up to the financial meltdown four years ago, just opined that the fallout from that crisis could last the rest of this decade. Roubini, widely acknowledged to have predicted the crash of 2008, sees tough times ahead for the global economy and is warning that without major policy changes things can still get much worse.

    He also warned that a conflict with Iran over its controversial nuclear program could lead to a global recession. And, until Europe radically reforms itself and the U.S. gets serious about its own debt mountain, the world economy will continue to stumble along to the detriment of large chunks of the world’s population who will continue to see their living standards under pressure, even if they have a job.

    Any thoughts?



  4. On Greece

    Greece recently reached an agreement with its creditors to restructure its debt, provided it implements additional austerity measures. The agreement gives Greece an influx of cash to keep its economy afloat and also secures the country’s membership in the European Union (EU).

    Of course, while Greece’s GDP represents less than 2% of the EU, there was fear that a Greek default—and potential exit from the EU—would lead to the collapse of other financially troubled European countries.

    Many of the countries previously at risk of leaving the EU, such as Portugal, Spain, and Ireland, have now implemented tough fiscal measures and financial reforms.



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