Greece tests investors’ nerve

Tear gas has the ability to linger in the air hours after it has been unleashed. Many financiers of Athens are used to its peculiar nose-tickling and eye-watering after-effects. The sensation has become routine for those of us who pick our way regularly through the debris of Syntagma Square, where the Greek parliament sits, in an effort to return to normal after the latest anti-austerity protest has died down.

But while Athenians may have become blasé about these outbursts of fury, financial markets are anything but. The latest round of political drama has left many investors troubled by the questions of whether (or when) Greece will default on its debt or even leave the euro.

Their concern is understandable. As PWM went to press, Greece’s ruling socialist party, Pasok, had just survived a vote of confidence, held after Prime Minister George Papandreaou reshuffled the cabinet in an effort to push through the latest round of austerity cuts, worth €28bn. This followed a wave of strikes and demonstrations against the austerity measures.

As the current round of cuts are conditions of the next €12bn tranche of the €110bn bailout from the International Monetary Fund and the EU, the spectre of an imminent default has begun to loom large. Even as crisis meetings in Luxembourg and Brussels were being held to thrash out the details of a second bailout of at least €100bn, on top of the €110bn agreed last summer, there were warnings that Greece would not be able to pay its debts.

Ben May, European economist at Capital Economics, was among those saying that a default had become a “matter of if, not when” and he added that he believed that the recent political turmoil had accelerated the timing, so that a default would happen in months rather than years.

Mr May said that Greece could also leave the Eurozone: “We think this is a distinct possibility. Greece has huge fiscal problems – particularly difficulties with collecting tax – and a lack of competitiveness within its economy and so a default might not be enough to solve its problems.” Leaving the euro would allow Greece to kick start its economy by devaluing its currency and boost exports.

Yet despite the fears being raised by many, the president of the European Commission José Manuel Barroso has insisted Greece will not be allowed to go bankrupt – and thus to cause the contagion so widely feared.

So where does this leave wealth managers? Robert Farago, head of asset allocation at Schroders Private Banking, agreed that Greece “is certainly a problem” but he advised investors against knee-jerk responses. He said: “This may seem to be a buying opportunity but we are not going to bet that there will not be a major event in Europe over the next few weeks so we are holding our positions.”

A similar line came from Ben Ritchie, senior investment manager at Aberdeen Asset Management. “Recent events in Greece should not change your investment strategy as they are just symptoms of a wider economic malaise which we were dealing with in any case.”

A Greek default, then, while creating short term volatility, should not change long-term investment strategies. He concluded, “Greece scares people, yes, but does it change anything fundamental? No.”

The message, then, is that wealth managers worldwide should follow the lead of stoic citizens of Athens and simply keep calm and carry on.