(Article for the Jakarta Globe – 4 June 2012 issue)
MONEY WISE
COULD THE EUROZONE CRISIS AFFECT YOU?
The chances are it already has! We now live in a global village and we cannot
escape the consequences when something goes wrong in another part of thevillage. The challenge to us is what, if anything, we can do about it.
How did the problem come about?
You may recall last week I talked about credit cards and how their misuse could
bring about a person’s financial downfall. There is a close analogy wherecountries are concerned. Let’s imagine every country has been issued with acredit card. Some countries have used it responsibly. An example is Norway, acountry which always pays its debts on time and has carefully built up itssavings. It enjoys an unemployment rate below 3% and its people enjoy a
comfortable, but not lavish, lifestyle. Other countries on the other hand haveabused their ‘credit cards’ and run up huge debts through their uncontrolled
spending. The biggest offender is the US whose national debt is now running
close to $16 trillion or $50,000 for every citizen. (Check www.usdebtclock.org
to see a fascinating real time display.) But the US has massive resources andenjoys the privilege of being able to pull in funds from all over the world,
particularly the Middle East and China, to enable it to remain solvent.
But Europe is a different story
Greece, one of the smallest economies in Europe, is not so fortunate. It hasseriously overspent in relation to its size and is now relying on its neighbours to
help meet its daily needs while it tries to pay off its ‘credit card’. If it were theonly individual in the village in serious debt it would not be too bad. The
problem is that its larger neighbours in the Eurozone, in particular Italy, Spain,
Portugal and Ireland have also been overspending. Their more careful
neighbours, Germany and France got together and proposed some strictausterity measures to reduce the debts but the people in those countries havenot taken well to the hardships imposed on them. They have protested in thestreets and even the French revolted and have elected a more left wing
government. The result is a big question as to whether the Eurozone and eventhe Euro can survive. On June 17 the Greeks will be electing a newgovernment. If the left wing wins as expected and rejects the austerity
measures the country could be the first to exit the club. Its ‘credit card’ would
be taken away. This is not the end of the story. The fear is that other countries
will then go the same way.
Europe’s problem now becomes everyone’s problem
If countries in the Eurozone walk away from their debts other countries will bebadly hit as their financial institutions have invested heavily in Europe andEurope is a big market for countries like China. If the problem can be restricted
to Greece it is manageable but if other countries start to default we are looking
at some serious repercussions for the global banking system. This would entail
another credit crisis and a withdrawal of liquidity from the financial markets.
Stock markets could fall further and emerging markets could see a flight ofcapital. We have already seen in Indonesia over the past few weeks millions ofdollars being withdrawn from the Jakarta Stock Exchange and a fall in theRupiah. This is no reflection on Indonesia but it cannot escape from being partof the global village.
So what can we do as individuals to avoid the storm?
First of all we don’t panic; the worst may not happen. Governments are awareof the consequences of a meltdown so they may come to a consensus after a
bit of sabre-rattling and brinkmanship and formulate a compromise agreementthat keeps the Eurozone intact. In such a situation markets are likely to rally
and we could see a period of optimism and recovery. Those with ample cash
reserves and who are prepared to take a risk in the short term could well makesome quick profits by investing in markets when they are down as at present.
But we should also prepare for the worst in the same way as we take out
insurance. Safe havens in times of crisis are strong currencies like the US
Dollar, Japanese Yen and Swiss Franc. Gold is also a traditional haven in timesof political or economic uncertainty.
Cashing in investments when the markets are gripped by fear is a natural
reaction but one which usually ensures that the investor never makes anymoney. Human nature drives people to buy high and sell low. Little wonder somany people make no money in the stock markets, even though they
undeniably rise over time.
Regular savings plans are one solution
One way to avoid the trap of buying high and selling low is to commit to aregular savings or retirement plan in which the same amount of money isinvested every month, irrespective of what is happening in the stock markets.
This results in cost averaging which entails the buying of more units or shares
when the price is low and fewer when the price is high. One caveat though;once a regular plan has begun it is very important to maintain thecommitment. Failure to do so can result in heavy losses through penalty
charges so do not take out such a plan unless you are confident of maintaining
it. You should always have ample cash reserves to ensure you never miss apayment.
Some basic precautions for adverse times
Keeping ample cash reserves is perhaps the most important principle to follow.
If you should lose your job having cash can see you through and reduce the riskof getting into debt. Thousands of people failed to follow this principle in theUS in the 2008 / 2009 credit crisis and lost their homes as a result.
Don’t put all or most of your eggs in one investment basket. There are many
attractive investment products that are not correlated with stock markets.
Some are not as liquid however so that should be taken into account as well.
Until the impact of the Eurozone crisis is known this is probably not a goodtime to be making a major purchase that requires borrowing money. And it is
not a good time to be running up credit card debt. If you do so you may end up
like Greece and have your card taken away!
Colin Bloodworth

PPi Indonesia