Greece has finally reached the point of no return it seems. It has run out of money to pay its creditors. Global markets have known for a long time this would happen. Now this scenario may soon become a reality. Greece faces a repayment of Euro 1.6 bn IMF loan at the end of the month. It is now clear that it does not have funds to do so. This was the major sticking point that resulted in the breakdown of negotiations on Thursday. As leading financial news networks have already reported, Greek banks may not open for business either on Monday! If a last minute deal is not worked out, the stage would be set for a sovereign default. This could result in Greece leaving the Euro zone.
There is no doubt this will have far reaching consequences. While a 'Grexit' would be catastrophic for Greece, other European economies too will feel the negative effects. This could lead to a contagion, the effects of which are not predictable today. European markets however, seem calm. This is because there is confidence that the situation will be contained. Even if it is, increased volatility cannot be ruled out.
As Indian markets are largely driven by FII flows, volatility could increase here too. However, this should not be viewed too negatively. It is in the nature of stock markets to overreact. The Grexit crisis, if it were to happen, will be no different. If the Indian markets were to fall, it would produce good opportunities to buy stocks with sound fundamentals backing them.
We believe volatility is a friend of the long term investor. Buying stocks of fundamentally sound firms, when they are available at good prices, is a proven long term investing strategy. Investors would do well to keep this is mind when Greece dominates the headlines, as it is likely to do this week.