With ongoing uncertainty in Europe creating volatility in sharemarkets, here are answers to some questions you may have.

What’s happening in Greece?

In the May elections, anti-austerity parties did better than expected, but no
party could form a government. This has led to fears that Greece isn’t
committed to the debt-cutting measures it promised as a trade-off for bailout
funds from European policy makers. Fresh elections will be held in mid June,
and it’s unclear what the outcome will be. If an antiausterity government is
formed, and the European Union doesn’t provide further funds, the Greek government
will soon be unable to pay its debts (a large chunk of which are owed to banks
in Europe and the European Central Bank). If this happens, Greece may choose to
leave the eurozone or be forced out.

Why does it matter if Greece exits the Eurozone?

What’s worrying investors most is the possibility of a ripple effect from a Greek
default and exit. Other European countries – Spain, Italy, Portugal and Ireland – are also in a lot of debt. Spain and Italy are larger economies than Greece, and their debts, which
are much bigger, are held by banks and investors worldwide. The Italian government
bond market is one of the world’s largest. If these countries default on their debts,
the losses would be felt by banks internationally. They’d be less willing to
lend, further dampening global economic growth at a time when several European
countries are in recession and the US economy is still recovering.

What’s caused the market volatility?

With the uncertainty in Europe, investors have become very nervous. They’ve reacted
to each piece of news about new developments, causing swings in investment
markets.

How is China performing?

After a period of very strong growth, China’s economy is slowing. It’s unclear how
far and fast the slowdown will be. However, if growth starts to weaken
seriously, policy makers in China can act quickly to stimulate the economy.

How does all of this affect Australia?

We’re not immune to these global concerns. Our sharemarket has recently seen similar
levels of volatility to international markets. A slowdown in the rest of the world,
and particularly in China, could hurt our exports. If there’s an international
shortage of loan funds, our banks will face higher funding costs. But there are
good reasons to be optimistic about Australia’s position. There’s still a
strong pipeline of investment, especially in the resources sector. The government’s
finances are much healthier than in most countries, and our banking system is
strong. Policy makers have room to cut interest rates further to keep the economy
growing, if necessary.

So what’s the outlook?

The future remains uncertain, as there are several paths the situation in Europe
could take. The problems facing Europe have been bubbling away for almost three
years and it will be some time before they’re resolved. You can expect
sharemarkets to remain volatile until the outcome is clearer. However, the
long-term outlook for European countries certainly isn’t all bad. History shows
that the countries in similar situations eventually recover and grow again. Despite the current market volatility, we believe shares still offer reasonable potential returns over the medium term – better than bonds, cash or property.