When it comes to Greece, most Britons only have one question to ask themselves – can they cope with its sizzling August heat? Yet the heat is on Greece already and whether you are planning a Greek Isle holiday or not, its economic troubles are affecting you.
The uncertainty across Europe has rocked stock markets and it has put investors in a nervous mood. Fund sales are at their lowest levels since the 2008 financial crisis. Many savers are avoiding equity funds in favour of lower risk corporate bonds and cautiously managed funds that invest in a spread of assets.
So what an earth is going on in Europe and how is its debt crisis affecting your finances?
Q: What has caused the debt crisis?
A: To put it succinctly, over-borrowing. Several countries, including Greece, have borrowed beyond their means and the ramifications of the financial crisis have left them struggling to repay their debts. This is why euro leaders, such as French President Sarkozy and German Chancellor Merkel, have been meeting over the past few weeks. They have been trying to come up with a rescue package to help the Greek government.
Q: Will it affect the UK?
A: Undoubtedly. Britain exports to the Continent, so if Europe’s economy collapses we will feel the impact. Many companies could struggle to increase sales, our economic recovery could falter and, ultimately, more jobs could come under pressure. British banks could also feel the heat because they will have exposure to eurozone debt.
Q: When will the euro debt crisis be over?
A: If the truth be told, no one knows. The debt crisis has been lingering for more than a year and there is no end in sight. The Greece rescue package is in the balance but there are also concerns that Italy, Spain, Ireland and even France could be at risk of defaulting on debt repayments. This one is likely to run and run for a while yet.
Q: What about my savings and investments?
A: Only Rip van Winkle would not have noticed that stock markets have been volatile for a while. They are likely to remain volatile while there is so much uncertainty in the world. Share prices are influenced by confidence as much as strong balance sheets – and all the uncertainty is denting confidence. The call for a referendum by Greek Premier George Papandreou has put the rescue package in jeopardy and this has dented confidence again – that’s why shares have fallen over the past few days.
Q: I’m worried about losing money. What should I do?
A: There is no one answer. It comes down to your personal attitude to risk and your own financial goals. Review any investments and ensure that your portfolio is diversified so that damage is limited if the markets continue to fall. Try and be patient. Investors tend to bail out of the stock market after values have fallen. Those investors that sold out of shares in September when the FTSE100 fell to below 5,000 missed out in the first few weeks of October because shares recovered to 5,750. History suggests that over time returns from equities beat returns from other assets such as cash and fixed interest, however they do come with increased risk.
Q: Surely there is some good news out there?
A: Well, there is for borrowers. The dire global economic situation means that interest rates are likely to stay at these very low levels for a while. With inflation putting a squeeze on household incomes, low mortgage repayments will be a welcome relief to many families.
Q: But I’m a saver and I want to income from my hard-earned cash?
A: You may have to think beyond saving in a cash deposit account. Dividend paying shares are an option. Company balance sheets are in better shape because they got their houses in order in the aftermath of the post-financial crisis recession. Many are paying dividends again – and remember dividends are the lifeblood of stock market returns. Shareholders today in many blue chip stocks are getting a good dividend yield which is the reward for patience. According to Barclays’ 2011 Equity Gilt Study, £100 invested in equities at the end of 1899 would be worth just £180 in real terms today without the reinvestment of dividend income; with reinvestment, the same portfolio would have grown to £24,133.