Greece – let’s call it what it is: a beautiful country with some horrible systemic problems. If you’ve been living under or behind a human-sized rock for the last few years, Greece is in the midst of a huge, solidarity-threatening fiscal crisis related to the fact that they have a debt much larger than their GDP- in 2011 those numbers are estimated at 354.7 Billion Euros of debt, or 161.8% of their GDP. Those are some hefty ratios for a sovereign entity to be carrying around – the equivalent of $161,800 of debt for someone making $100,000.
Greek has worked itself into a situation which is quickly demanding a rough decision. Greece pretty much has two options: either (when I say Greece, I mean the people of Greece – but that referendum might be canceled) accept austerity measures handed down from the rest of the European Union nations, or leave the Eurozone, default on their debt, and bring back the drachma. Neither is very enticing: the first isn’t guaranteed to work, and the second, defaulting on debt, is never a fun situation since foreign investment will quickly dry up.
This article is more concerned with the second possibility. What does a Greek default mean for you and your investments?
The S&P 500′s Massive Overreaction to the Greek Referendum
When the Greek referendum was announced over the weekend, that news and the news of the bankruptcy of MF Global (among other things for making huge Eurozone debt bets) drove the S&P from a close of 1,285.09 on Friday to a close at 1,218.28 on Tuesday – a drop of 5.2% in only 2 trading days. Keep this number in mind: In 2010, Greece’s Gross Domestic Product was $304.865 Billion, according to The World Bank.
The S&P 500 indexes 500 of the largest most representative companies of the United States, and is weighted by Market Capitalization. Market Cap is the value of a firm based upon the number of shares and their trading price. At a level of 1218.28, the total S&P Market Cap was $11,096,409,020,000 (yep, $11 trillion). Assuming market cap stays constant (I’m ignoring things like dividends for this analysis), every point in the S&P represents $9,108,258,380.67 in market cap. So, from Friday to Tuesday, the S&P 500 shed $608,522,742,412.56, which is roughly twice as large as the entire GDP of Greece.
Greece’s Part on the World (And the European) Stage
According to The World Bank, the world’s GDP was $63.044 Trillion in 2010, meaning Greece was .48% of the world’s economy. When Russia defaulted on its bonds in 1998, their world GDP share in 1997 was 1.34% of the world, while Argentina’s share in 2001 (one year before their 2002 default) was .84%. Those two defaults were harsh – but they didn’t end the world. (More on the Russian default in a second).
According to Eurostat (2010 numbers), Greece is only 2.48% of the Eurozone’s economy. The largest share, of course, belongs to Germany – 26.99% by GDP. The largest stock in the S&P 500, depending on the day, is either Exxon Mobil or Apple Inc. At approximate market caps of $370 Billion, either company represents 3.33% of the index.
A Side Note, on the Bankruptcy of MF Capital
One thing I’m glazing over in this article is the possible domino effect from a Greek default. Greece may be the so called canary in the coal mine – the first in the list of Ireland, Portugal, and Spain (and Italy?) to default. That’s a huge deal – certainly something to keep an eye on. Which brings me to MF Global…
MF Global is not Long Term Capital Management, the hedge fund which had to be bailed out in 1998 with a leverage of 250:1 (and debts of $100 Billion) after Russia defaulted on its debt driving global debt yields haywire. MF Global‘s bankruptcy came at a “more orderly” leverage of 44:1 (and liabilities north of $40 Billion) after making an ill-advised $6 Billion bet on Eurozone debt. $40 Billion in 2011 is not the same as $100 Billion in 1997. Note: that same World Bank Source tells us that the US had a GDP of $14.582 Trillion in 2010, and $8.741 Trillion in 1998.
While all of these market events play out, those of us who invest need to know what we should do. Here’s my point: the markets weathered Argentina, and they even weathered Russia and Long Term Capital Management. They can surely handle a Greek default. As long as the fundamentals of a stock are sound – and other than some banks (and insurers, who have large investment portfolios) which may get caught in the storm – dips might be a good time to buy. Of course, due diligence still applies, and ask an adviser if you need individualized help… but note that any large market moves to the downside could be just the buying opportunity you need to juice returns after a strong October.
Good luck out there, and hit up the comments!