Tom: Greece has been dominating the financial headlines and roiling markets around the world, what is going on?
Mellody: That’s right, Tom. This week saw welcome headlines in Greece and Europe, as the country and its lenders reached a last-minute agreement to quiet the Greek debt drama. Before the financial crisis in 2008-2009, the Greek government was borrowing a lot of money to finance various projects and policies, based upon an overly optimistic economic outlook for the country. Once the world economy started struggling, investors grew concerned about the ability of Greece to make its loan payments. This meant higher borrowing costs that the country could not sustain. Since that time, the country has received financial support from international financial institutions to stay afloat. These latest headlines have been a result of Greece and its lenders being at loggerheads about another round of financial bailouts, and the terms surrounding it. That is now over, at least for now.
Tom: Should everyday Americans be concerned about what happens with Greece? Can we be hurt by their debt?
Mellody: Everyday Americans have very little exposure to Greek debt. At the beginning of the crisis – nearly 6 years ago now – significant amounts of Greek debt were held by private investors. However, over the years, this exposure has been reduced significantly, with most of the country’s debts now being held by European governments, the European central bank, and the International Monetary Fund. As a result, everyday investors here in the United States have little to worry about in terms of big ripple effects from Greece.
Tom: Do you think this issue is now behind them and therefore us?
Mellody: The good news is that the parties have reached an agreement for a new financial support package. The bad news is that it is not totally in the rearview for everyone yet. The deal will allow Greece to remain in the Eurozone, and ensure that its banking systems will continue to operate. But it does saddle the country with even more debt.
In terms of whether it is in our rearview, i would say mostly. We may see some jitters on the markets, but they are not likely to be massive. The markets have been watching the negotiations play out for some time now, and the uncertainty has been priced in to the market. As for the Eurozone, it is in an entirely different place than it was in 2010 or 2012, as policymakers have worked to ensure that troubles in Greece do not spread beyond it.
Tom: And while we are on the subject of foreign countries affecting the financial markets, is our deal with Iran a good thing for investors?
Mellody: You have heard me say it many times before: the thing that the markets hate the most is uncertainty – particularly when it comes to the Middle East – and this deal ends the continuing uncertainty around the iran issue. Beyond that, it opens up a lot of business opportunities after sanctions are lifted, particularly for European countries, which may help the EU growth numbers. On the downside, Iran is a big supplier of oil, so oil prices and therefore the energy sector, might see some mild negative movement, but i would not expect those to happen immediately, or to be very large. But considering that low oil prices mean low gas prices, consumers can expect to see some positive movement at the pump!
Tom: Always great to have you join us, Mellody!
Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news and CBS.com.
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