5 investing lessons from Greece

For regular savers and investors Greece holds several lessons

5 investing lessons from Greece

Greece’s  exit from the Eurozone and even the European Union is now much more likely, given the refusal of the ‘troika’ of the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) to support the efforts of the new Greek government to reform its economy.

Greece was never going to be able to pay the debts that previous Governments had taken on and its attempts to do so over the past 5 years have devastated its economy, shrinking it by 25%. More austerity is not a viable option for a Syriza government that was elected to stop austerity.

By attempting to bully Greece into doing so, the troika have laid bare:

  • Their lack of understanding of how a real economy works
  • Their anti-democratic tendencies
  • Their lack of vision for a co-operative organisation that functions in the best interests of its people rather than its financial sector

Lessons for the UK

We in the UK might like to think we won’t be affected by the fallout from a Greek exit of the Eurozone, but it is likely that we will be in the following ways:

  • Market volatility is likely to increase. Nobody really knows what will happen now. That will make markets nervous. If Greece can be forced out of the Eurozone for standing up for its people and seeking to renegotiate debts that were unpayable, who is next? Italy? Portugal? Spain?
  • Voters across the political spectrum in the UK are now more likely to decide we don’t much care to work with the sort of people who run the EU and who can humiliate a fellow member like Greece. If that does happen, and we vote to leave Europe in a referendum, market reaction may be merciless.
  • The derivatives exposure of banks around the world to Greece, Italy, Spain etc is little known and understood. Therein, lies a big systemic risk that could lead to bank collapses outside Greece.
  • Were we to see bank collapse this contagion could lead to bank closures in other European countries, even here in the UK.
  • If the banks were to close for a week, you need to ask yourself: how could I cope?

This might strike some as alarmist but, given what nearly happened to the UK banking system in 2008, it isn’t.

What should you do?

Here are 5 measures I’d recommend. (Of course, I’m no independent financial advisor so you should seek the advice of experts before making any investments.)

1) Ensure any savings are spread across different banks. If a UK-regulated bank fails and doesn’t have the money to repay your cash deposit, the simple rule is that up to £85,000 per person per institution is fully protected by the UK’s Financial Services Compensation Scheme.

If you have more than one account with the same banking or saving brand, or several brands that come under the same authorisation, the total amount covered by the FSCS is still only £85,000 per person. (Visit the Financial Conduct Authority website to see whether your bank uses more than one brand name.)

 

2) Regularly monitor the financial strength of your banks. You can check credit ratings with Moody’s, S&P and Fitch. These will show you what the markets really think about the financial strength of your bank/building society.

You also obtain the Annual Report of your bank or building society and see how its price compares to its book value. If it trades at a huge discount to its assets, it may be because people doubt the real value of its assets.

 

3) Learn more. We’re fed a lot of misinformation and you must try to learn more about the financial system and how it really works. Debt plays a huge part in this, yet is ignored by classical economics.

Twitter is a great resource for intelligent and informative articles if you know where to look

There is also plenty of information on Every Investor to help with this.

  • We’ve conducted numerous interviews with economist Professor Steve Keen.
  • Mitch Feierstein, author of Planet Ponzi, is a hedge fund manager who knows the system from the inside out.
  • There is an excellent documentary called ‘Four Horsemen’ that explains how the system really works. If you only watch 5 minutes, start from 18 minutes into the film. It is a real eye-opener explaining how banks really work and how it affects mere mortals like you and me.

 

4) Keep cash. Always keep a little cash with you when lots of bad news about financial markets is in the news. You’ll probably have a few weeks warning, before things turn really bad. If they do, cash will soon run out.

This is because banks hold only a tiny percentage of actual cash. They create money electronically.

 

5) Trust physical gold. In Greece now, those who don’t have actual cash in their hands are reliant on the goodwill of others. This is never a nice play to be. If you have a few gold or silver coins, you have some purchasing power no matter what the fiat currency does. Gold will still be around long after the Eurozone is history.

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Categories: Viewpoint

About Author

Christopher Menon

Every Investor Editor Chris Menon is a financial journalist who has written regularly for national newspapers, magazines and websites about personal finance, with particular emphasis on investing.