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Klingman Insights

A Greek Tragedy

If you have turned on a television or picked up a newspaper in the last few days, you have likely come across the standoff between Greece and its "creditors", which include the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB). While tensions between the parties mount and volatility intensifies across global markets, we believe it is important to put the events in perspective as we consider their potential effects on the global economy in the long-term.

To give some background on the developing story, the "creditors" have organized a series of bailouts (amounting to $217b) to the Greek government over the last several years. While the Greek government has taken many steps to improve their fiscal situation, it has become apparent that they do not have the ability to make the July and August payments. The creditors are demanding a series of additional policy changes including reducing pension payments, raising the retirement age sooner, and cutting back on early retirement immediately in return for additional debt relief. Over the weekend, the Greek Prime Minister Alexis Tsipras pulled out of negotiations with the creditors and called for the Greek people to vote on the demanded policy changes (scheduled for July 5th). Mr. Tsipras strongly urged voters to vote against the proposed austerity measures.

While we continue to follow the developing story and monitor new headlines as they flash on our screens, it is important to put this all into context. In economic terms, Greece is a tiny country. It’s GDP (total output of goods and services) is 6% of Germany’s, 0.4% of the World’s, and comparable to our beloved constitution state, Connecticut. While it is evident that Greece’s economic footprint is relatively small, the real concern lies around the contagion effect on peripheral European nations (namely Portugal, Spain and Italy). We believe that the chaotic events in Greece, if anything, has made it less likely that Italy or Spain would head down the path toward exiting the Euro.

If Greek voters vote "yes", agreeing to the additional austerity measures in return for an extension on the loans, Greece will likely fall into another recession. If the voters vote "no", rejecting austerity, it will present the creditors with a difficult choice to either force Greece out of the Eurozone or continue to help Greece ease out of the crisis. If Greece is indeed forced out of the Eurozone (the more likely of the two scenarios), we expect to see short-term volatility in European and broader global markets given panicking investors responding to the headlines and draconian news coverage. The ECB and European Union is much more prepared for this than is 2010 when the debt troubles first surfaced, and we expect this to be a somewhat isolated event: painful for the citizens of Greece, but relatively benign for global economies and markets in the long term.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Klingman & Associates, LLC and not of Raymond James.

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