Is Greece avoiding the inevitable?

While money is being thrown at the indebted country, Julian Knight warns it's your pension and investments that are at risk

So what does it matter to you if a Greek civil servant gets to retire at 53? Well, quite a lot.

According to many observers – EU and IMF assistance not withstanding – the Greek state's finances are almost beyond help. The government's debt is equivalent to more than 150 per cent of the nation's gross domestic product and it's still touch and go whether or not austerity plans meant to ease the mess will actually get the green light.

But yet Greece is in European terms very small fry – about 2 per cent of the whole European economy. Nevertheless, each new twist and turn of the Greek tragedy sends equity markets around the globe into freefall and this hits your pension savings and investments. And when the Greeks default on their debt – and it's almost certainly a case of when rather than if – it could potentially have a massive further impact on your finances.

"Like the sub-prime crisis in the US, it's difficult to quantify where the damage from a Greek default could start or finish," said Phil Poole, HSBC's head of global investment strategy. "Let's say this would happen today. Then we would see some banks come under pressure and we know only too well from the Bear Stearns and Lehman Brothers crises the interrelation of the banking system. This could go on to hit the real economy as confidence evaporates and then you get lower levels of lending and business expansion. That's why the EU and IMF are adopting a policy of buying time by trying to support the Greeks now."

Ben Bennett, credit strategist at L&G investments, echoes the seriousness of a Greek debt default. "Barring a political meltdown in Athens, the people that will decide the timing are politicians from Germany, France, etc. They can choose to bring the event forward and share the burden with the private sector that still holds a lot of Greek debt," he said. "However, European banks would struggle to cope and would need bailing out, plus there could be devastating contagion for other European countries that are subsequently shunned by markets. The only option is to keep throwing money at Greece and buy a couple of years."

Bailing out now to give the banks and other states in the EU with exposure to Greek government debt, as well as Ireland and Portugal time to sort out their problems, has been dubbed "kicking the can down the road". "The cost to the Greek and European economy (of a debt default) and markets could be huge. As a result, it is better that Greece is given more time to improve its finances. In short, we think that Greece needs to default, but not yet," said Rupert Watson, head of asset allocation at Skandia Investment Group. And the contagion may not stop with Portugal and Ireland: Spain and Italy could soon come under renewed pressure. Last week, for instance, ratings agency Standard & Poor's downgraded the credit worthiness of the Spanish region of Valencia.

But Greece's continual flirting with debt default is depressing the markets. The FTSE 100 was closing in on 6100 at the end of April only to have fallen to below 5700 today. "The danger with the policy being pursued towards Greece is that it erodes confidence and the markets and the financial system run on confidence. We have already seen a sell-off of shares and this has coincided with the summer months which traditionally sees lower volume trading," said Mr Poole.

So with those investors holding Greek government debt likely to take, in City parlance, a "hair cut" – a reduction in the income from their investment – what can you do to copper-bottom your finances?

"As an investor you have a careful look at what investments you hold and look to diversify, spreading your risk in effect," said Adrian Lowcock from financial advisers Bestinvest. Two investment areas Mr Lowcock favours in turbulent times are absolute return and UK equity income, funds but investors have to choose their manager carefully. "Absolute return funds which are structured to grow even when there is a market downturn have had a bad press of late, mainly because of several poorly performing funds such as the high- profile Jupiter Absolute returns fund managed by Tony Nutt. However, there are some good managers out there and the mix of assets and ability to hedge investments should make absolute returns a good play in these markets." In particular, Mr Lowcock likes the Standard life global absolute return strategies fund, which has returned standout growth of 25 per cent in the past two years.

As for UK equity income – which focuses on profit-making companies which pay a dividend – Mr Lowcock is even more bullish. "Everyone should have one of these types of funds as they are geared towards investing in good companies which pay a dividend to their shareholders. I like the look of the Artemis equity income fund which has enjoyed 19 per cent growth in just one year. For those looking to diversify from the UK, then an overseas equity fund does the same thing but globally. In this field the Aberdeen world growth and income fund is one of the best."

Longer term, with the European sovereign debt crisis likely to drag on into 2012 and even 2013, Mr Poole thinks investors should look at the emerging market economies or shares in UK listed countries that trade with those economies. "if you're not already invested then it makes sense to gain exposure to the emerging economies of Asia and South America."