The next few days will be high stakes on global financial markets as the results of the Greek election are digested, and just as importantly, the G20's reaction to the outcome of the election, along with that of central banks.
The Australian equity market will remain skittish as investors grapple with so many global unknowns, as well as the potential for more local profit downgrades as company boards sign their company accounts for the June 30 year.
Companies that have suffered big share price falls in the past few weeks are the ones most likely to announce profit downgrades or big asset write-downs as ASIC has been reminding companies of their accounting rule obligations when it comes to asset impairment charges.
In the past year the All Ordinaries index has fallen almost 10 per cent, which has a knock-on effect on the annual financial year performance of super funds, particularly balanced funds, and reduce the returns of Australia's $1.3 trillion retirement savings.
The brutal reality is that local and global equity markets have been living in fear for the past three years, and that will not change in the short term.
World markets have been praying for a fairytale ending to the European crisis. What they have got is an unfolding nightmare that has left policy makers hoping that whatever the outcome of the Greek elections today, Greece will remain in the eurozone.
Ultimately, Greece will leave the euro, and the outcome of today's election is unlikely to temper that inevitability. Who wins the election will merely determine the speed. If the pro-bailout New Democracy Party claims victory, Greece's departure will be slow if the extremist Syriza wins, it will be accelerated, and if there is an inconclusive election outcome, the timing of its departure will be unpredictable.
But in the short term, the behaviour of markets will depend on the effectiveness or otherwise of the G20 meeting in Mexico today, where the focus will be on how to prevent an immediate breaking up the eurozone and destabilisation of the world economy.
It is reaching a critical point were the problem is far greater than getting the right government to run Greece. Spain is in trouble and Italy looks likely to be months away from requiring its own rescue plan.
Unfortunately nobody has an answer, which has battered confidence around the world and heightened an already volatile market and has started to create social unrest in some European countries.
Greece is almost ungovernable these days, a function of its bankruptcy, the collapse of proper institutional structures, chronic tax avoidance, an alarming decline in living standards and the abandonment of hope.
But the problem is wider than economics. Social unrest has the potential to spread like wildfire.
In Australia, the problems in Europe have had an impact on market sentiment, confidence, credit markets and the dollar. If the problems get worse, they will ripple through China, one of Australia's biggest trading partners, as well as the US, which is already suffering from its own issues.
What happens in Greece over the next few weeks, followed by Spain and Italy, will dominate everything. Let's hope sense prevails and governments and the global financial system are well prepared. With the crisis going on for so long, there certainly ought to be.
Frequently Asked Questions about this Article…
Will Greece actually leave the euro, and how soon might that happen?
The article argues that Greece will ultimately leave the euro, but the election result mainly determines the speed. A pro‑bailout New Democracy win would likely make departure slower, a Syriza (anti‑bailout) win would accelerate it, and an inconclusive result would make timing unpredictable.
How could the Greek election results affect global markets and Australian investors?
The piece says markets are on edge: global investors will watch the election outcome and the G20 and central bank reactions. For Australian investors, heightened uncertainty can make the equity market skittish, affect market sentiment and credit conditions, and ripple into returns for local portfolios.
What short‑term market risks should everyday investors expect after the Greek vote?
According to the article, short‑term risks include continued market volatility driven by fear, potential profit downgrades or asset write‑downs from companies, and the market’s reaction to how effective the G20 and central banks are at stabilising the eurozone.
Which companies are most at risk of announcing profit downgrades or big asset write‑downs?
The article highlights that companies that have suffered large share‑price falls in recent weeks are the most likely to report profit downgrades or significant asset impairment charges, and notes ASIC has been reminding companies of their accounting obligations around impairments.
How has the European crisis already affected Australian superannuation and retirement savings?
The article notes the All Ordinaries index fell almost 10% in the past year, which can reduce returns for balanced super funds and has a knock‑on effect on Australia’s roughly $1.3 trillion in retirement savings.
What should investors be watching from the G20 meeting in response to the Greek crisis?
The article says investors should focus on whether the G20 meeting can prevent an immediate breakup of the eurozone and stabilise the global economy — the meeting’s effectiveness will influence market behaviour in the short term.
Could problems in Spain and Italy make the European crisis worse for global investors?
Yes. The article warns Spain is already in trouble and Italy could be months away from needing its own rescue plan, meaning developments in those countries could dominate markets and worsen global investor sentiment.
Is social unrest in Europe a concern for investors, and why does it matter?
The article flags social unrest as a real risk that has the potential to spread and further batter confidence. That social and political instability can heighten market volatility and complicate economic recoveries, which matters to investors monitoring geopolitical risk.
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