As many newspapers have recently punned, Greece is the word. The country's debt troubles have been one of the lead news stories of the last month, and with good reason. Its situation concerns the entire European region, with a specific potential domino effect on other indebted countries such as Spain, Italy and Portugal. Concerns around Greece have affected investor sentiment to the extent that we have seen market falls across Europe, including the UK. Greece's debt and how it relates to other countries, and to markets, is a complex issue. It's useful for investors to have some background on this and know how the Multi Manager team is currently positioning its portfolios which are invested in funds across Europe and the rest of the world.
So what's the background? Quite simply, throughout the last decade, Greece borrowed heavily in order to sustain its economic growth and compete with other European nations. In the wake of the economic crisis, and like many other countries and companies, it has found itself unable to pay off its debts or borrow any more money to do so. Its debt has been downgraded, meaning it has very little value. It also means that Greece now has to pay much, much higher interest for any new debt it tries to issue. The combination of a high stock of debt from the past, that Greece wants to refinance (roll forward) because it now struggles with repayments, and the high interest it has to pay for new issuance, could create a debt spiral where the country eventually just can't meet its obligations anymore. To prevent this, some of the debt has had to be written off, while some is being dealt with in the form of a rescue package. This has been put together by the International Monetary Fund (IMF), France and Germany after extensive discussion with all the lead European nations.
As part of this package, the Greek government has recently issued bonds, all of which it has managed to sell. While this has bought short-term financial relief, Greece is set to pay the price in the long term due to the high interest rates on this debt. In order for this not to result in the debt spiral described above, a major aspect of the EU rescue package revolves around allowing Greece to refinance its debt at lower rates. In effect, by underwriting Greece's debt, Germany…
