As you will probably be aware there is a crisis going on in Greece at the present time.

In a nutshell the Greeks have taken on too much debt and will ultimately need to “restructure” or default on some or all of their debt. Their creditors which are largely other European governments are understandably concerned with extending new debt to Greece, and instead want the Greeks to undertake painful structural reforms to their economy and live with high levels of austerity.

This crisis has now come to a head with the Greek government baulking at new and more onerous austerity measures, and the governments of other European countries baulking at making more loans to Greece.

The situation is currently very fluid and it is very hard to predict the next move by the Greek government or the governments of the rest of the European Union countries.

Greek debt is almost entirely owed to other European governments and the International Monetary Fund (IMF). So the direct effects of a default by the Greek government will largely be born by the other European governments. There is very little lending to Greece outside of Europe, and we would expect that Australian banks have minimal exposure to this particular risk.

The Greek economy is small and the crisis while painful for the Greeks should have limited direct effects on other economies around the world.

So the direct effects of default and crisis by Greece are actually likely to be quite modest.

There is the potential however that the Greek crisis scares investors and they start to react to some of the other more serious potential risks that exist in the global economy, and share markets today.

A small spark while unimportant in and of itself can sometimes trigger a large fire if it falls on dry tinder.

There are a number of significant potential risks in the global economy today, these are:

• Interest rates are expected to rise in the US in the coming few months
• The US share market looks very expensive, and
• The slowdown in the Chinese economy could, if it worsens, become a big issue for Australia

None of these risks are directly linked to events in Greece.

So in our judgement the real risk inherent in the Greek crisis is that it leads to investor concerns rising more generally. This in turn makes them try to reduce their equity exposures as they focus in on some of the more serious latent risks in markets today.

If the Greek crisis stays “local” it should blow over in a few weeks, if it starts to trigger wider concerns then the situation could worsen.

Should you have any questions, please don’t hesitate to give any of us a call.