This Time is No Different
Friday, April 17, 2015
Greece is back in the spotlight following renewed concerns over a potential default on its loans and exit from the Euro currency. Unfortunately, this is a position the country knows all too well, having spent over 50% of the time, since 1800, in a state of default. In fact, sovereign defaults and restructurings on external debt are quite common as Carmen Reinhart and Kenneth Rogoff point out in their book, “This Time is Different”. If anything, it was the recent lull in sovereign defaults that was abnormal.
Bloated government balance sheets around the globe are making many investors concerned that another wave of defaults is imminent, but we believe it’s important to keep perspective. Consider that in 1947, countries representing over 40% of global GDP were restructuring or in the state of default. This may sound scary for equity investors but it had little impact. $1,000 invested in the S&P 500 Index at the end of 1947 would have been worth $4,760 after 10 years, assuming dividends were reinvested.
Owners of private businesses wouldn’t contemplate selling shares of their business when a country runs into financial hardship and, as sovereign solvency fears once again blanket front page news, neither should owners of publicly-listed businesses. This time is no different and investors should stay the course.