Contention and controversy set the tone in Greece

Note: Unless otherwise noted, specific data cited throughout this commentary are supported by sources that include Reuters, Bloomberg, Eurostat, the European Central Bank, and the European Commission.

On Sunday, July 5, Greek citizens voted by a strong majority to reject the most recent rescue package proposed by euro zone creditors.

The scale of the problem

Exactly how much funding is at stake? A lot. Greece currently owes €323 billion to a number of creditors, including the International Monetary Fund (IMF), the European Central Bank (ECB), Greek banks, the Bank of Greece, the Greek Loan Facility, foreign banks, private investors, and governments within the euro zone. At the country level, the biggest creditors are Germany (€56 billion), France (€42 billion) and Italy (€37 billion).

As it stands, European nations with healthier economies feel that Greece should be able to live within its means. But the austere conditions of the existing bailout programs have resulted in more hardship that includes an unemployment rate above 25%, extreme poverty, and bitter resentment among many Greeks. Gross domestic product has decreased by more than 25% since 2009, and Greece remains in a severe depression with a debt burden that is 180% of GDP.

These conditions notwithstanding, we remind investors to keep in mind that the GDP of Greece is about the same size as the city of Seattle’s, and it accounts for only 2% of the greater euro zone economy.

Outlook: More complications

With news changing on a daily basis, it’s difficult to predict what Greece’s future will bring. Regardless of the outcome, equity markets are likely to remain volatile in the near term as other factors complicate the Greek ecosystem and make a short-term solution to Greece’s economic malaise seem unlikely to us. Consider:

  • Corruption is a big problem. So are rampant tax evasion, stifling regulation, and widespread petty bribery. But corruption has delivered the biggest beating, with approximately $22.8 billion in potential government revenue lost every year (according to an estimate published by the Brookings Institution). A 2014 study by the European Commission indicated Greece was the most corrupt country in the European Union, putting it on par with China.
  • The lack of a unified government is another sore point. In January 2015, the left-wing Syriza party easily won the election led by Alexis Tsipras, who was then generally viewed as a charismatic and spirited leader. The Syriza party promised to end austerity, ease onerous bailout terms, reverse budget cuts, and boost wages. Conditions today are a far cry from those ideals. The referendum vote has essentially put the nation on pause — financially and politically — with the specter of a failed banking system on the horizon. Currently, bank customers are allowed only minimal cash withdrawals, and bank reserves are quickly drying up.

Tarnished remnants of a rich legacy

Greece has provided the world with a remarkable cultural legacy, from the founding of the Olympics and democratic principles, to classical architecture and philosophy. Sadly, it has also bestowed a modern history of poor financial stability. Let’s put this last point in perspective.

Greece has been in default to its creditors for roughly half the time since it became an independent state almost 200 years ago. (It has been in default for 90 of those years.) Ecuador and Honduras are the only other countries that have defaulted more often. In that light, today’s headlines of exasperation and chaos are not completely out of place.

Risk of contagion?

We believe that the contagion risk to the rest of Europe is much lower than it was five years ago. Most of Greece’s debt has been transferred from the private sector to the public sector. Investors have known about the issues in Greece for a long time now and are generally clear on which banks have exposure to Greek debt in a way that was completely unknown in the contagion within the banking sector in 2008-2009. The ECB has also pledged “to do whatever it takes” to support the monetary union and has so far committed €1.1 trillion in quantitative easing to keep bond rates down. GDP growth rates are also recovering in the euro zone, which was not the case five years ago.

On July 6, IMF Managing Director Christine Lagarde said that the IMF “is willing to assist Greece if requested to do so.” Banks in Greece are scheduled to remain closed until July 11. Greece’s controversial finance minister resigned and was replaced with Oxford-educated Euclid Tsakalotos. Prime Minister Tsipras will present a Greek proposal for aid at Tuesday’s European Union summit. The ultimate outcome of the Greek crisis is difficult to predict, and it will stretch out over a good deal of time — but evidence suggests it will be a bumpy ride.

The views expressed represent the Manager's assessment of the market environment as of July 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 362-7500. Investors should read the prospectuses and the summary prospectuses carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

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