Posts Tagged ‘bailout’

11.03
2011

Do the Greeks know which side their (pita) bread is buttered?

It was clear to us that there were always likely to be further hiccups following last week’s Euro Debt Agreement. If the naivety of asking the Chinese to contribute after having effectively announced that Europe would be dependent upon them to do so wasn’t enough to cause jitters, the Greek PM has clearly caught everyone (including Merkel & Sarkozy) by surprise with his decision to seek a referendum. The markets reacted badly to the uncertainty (as they always do) and there is a very real possibility of the debt deal falling apart. The fact that there is open talk of the Greeks leaving the Euro tells you the severity of the situation.

From an investment perspective, it is always important to look beyond the hyperbole, and of course making sure we are not making knee-jerk reactions that are in any case one day too late! Our assessment this morning draws on one telling piece on the news last night; four Greek citizens were interviewed and asked if they were in agreement with last week’s debt deal and they were all vehemently against it, and the austerity measures, and would definitely vote against them in a referendum. When the same people were then asked if they wanted to leave the Euro, they all equally strongly stated ‘no’.

Whether the referendum goes ahead or not, we do not know, but if it does we suspect by then the question will be whether the people wish to remain in the Euro or not. This being the case, we think the Greeks on the street understand which side their (pita) bread is buttered.

Posted by Ian on 11.03.2011

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12.09
2010

Investment Matters: Hot Off the Press

We’ve just released our quarterly newsletter Investment Matters.

Here’s a snippet from the Market Overview:

The world remains a dark and dangerous place for the unwary investor in 2010. Many traditionally secure investment asset classes have continued to demonstrate levels of volatility that do not support their “secure” status and the need for continual vigilance has never been greater.

The big story of recent weeks has of course been the Irish Govern­ment bailout. The Butterfly Effect has ensured that the problems of this tiny nation of 4.5m people have rippled around world stock markets causing substantial sell-offs in Europe, the UK, America and further afield. The real fear is that what started in Greece and has spread to Ireland will not stop there. If Portugal or the much larger economies of Italy and Spain require a bailout the cost will be on an altogether different scale and maybe unaffordable even to the European economic superpowers?

In the meantime, another round of Quantitative Easing (Q.E.) from Mr Bernanke and the US Federal Reserve as they continue to try to spend their way out of the recession has buoyed up equity markets but achieved little else. Money intended for small businesses has been used instead to prop up bank balance sheets and buy shares and as a result equity markets remain somewhere near to their 12 month highs. As long as the European debt crisis can be held at arm’s length equity markets may continue to defy gravity. With QE propping up the markets and European Debt dragging them down, they begin to look like a driver with one foot on the accelerator and the other on the brake. They continue to steer the car and toot the horn as they career downhill and consequently the potential for an accident remains high.

To download our latest Investment Matters newsletter click here.

Posted by Fish on 12.09.2010

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07.26
2010

Club Tropicana Drinks Are Free…

European Debt Crisis - Restoring confidence - is there such thing as a free drink?

Confidence in the European banking world has been a little shaky of late. The “Club Tropicana” countries of Portugal, Italy, Greece and Spain have been living the high life in recent years and it turns out that the party has been largely fuelled by loans from European banks. These banks are positively awash with exposure to southern European debt (private and sovereign) and the major European powers, it seems, will do almost anything to keep the party going for fear of what happens when the music stops.

Despite the reassuring words of Wham, the drinks at these parties very rarely turn out to be free (although rumour has it, Greece really did get in with just a smile!). The only real question is who ends up with the tab?

The latest effort to restore confidence was at best a compromise. Bank stress tests that are too weak reassure no one. But stress tests that are failed by everyone are hardly reassuring! In this sense, last weeks tests were probably pitched about right. Only seven of 91 banks tested missed the cut and none of them was a big name. So far so good.

The truth is that the stress tests were just not very stressful and as a result do not tell us too much about how they all will cope if the wind really does start to blow

The result is an extension for now, but we still feel that this represents a denial and postponement not a solution.  A double dip recession remains a distinct possibility.

We are therefore adding some sun cream to our earlier sticking plaster metaphor as there is a real danger that unwary investors could get burned. Factor 50 on standby!

Posted by David on 07.26.2010

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06.04
2010

Nervy European Banks – Watch Out!

Tension is rising in the interbank credit market and PIIGS bonds

 LIBOR rates are now at new multi-month highs. Fearful of counter-party risk, European banks are refraining from lending to one another, hoarding cash with the ECB. Moreover, the PIIGS bonds are struggling. The Italian 10-year bond yield, for example, have surged all the way back to the pre-bailout levels. A similar outlook is noted for the Spanish long-term bond yields.

Posted by Ian on 06.04.2010

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05.26
2010

Europe Papering Over The Cracks As Debt Crisis Spreads?

The outcome of the General Election here in the UK was widely expected to have major ramifications for the UK markets. In reality, it was completely overshadowed, for the time being at least, by the widening sovereign debt problems in southern Europe. The Greek debt crisis has served to highlight a number of burning issues that just won’t go away.

The issues:

1. There is the question of “Moral Hazard”. If governments know that there will always be a bailout, where is the incentive to behave responsibly?

2. Will the indebted countries take their medicine? The so called PIGS (Portugal, Italy, Greece & Spain) need to tighten fiscal policy significantly; with interest-rate cuts and devaluation ruled out by euro membership, that implies wage cuts and massive unemployment.

3. Will Germany be able to pass the legislation to permit such bailouts? For how long will their responsible populace be prepared to write a blank cheque?

4. Are the bailouts affordable anyway? All the AAA-rated nations in Europe already have public debt-to-GDP ratios of 70%-80%. So we cannot be confident that countries will be able to raise the amount required.

Is it just a giant sticking plaster?

The most recent €750bn initiative by the EU and IMF to provide loans or guarantees to individual Eurozone governments is in reality just a ‘giant sticking plaster’ rather than a solution to the sovereign debt crisis. It may provide some comfort to the lenders that there is some guarantee from France and Germany behind their IOUs however bad debt just doesn’t disappear. Most of the PIGS cannot afford to service their debt let alone pay it back. Europe’s leaders have merely passed the debt along to a broader audience. Now, the ghost of Greek, Portuguese, and Spanish debt haunts the whole continent.

What all of this really serves to do is highlight the yawn engulfing competitiveness between northern and southern Europe and the problems and contradictions within the Eurozone that were easy to ignore during the boom times. Greece and the others have been “keeping up with the Jones’s” and the problem is that they have become used to the lifestyle.

These problems are being reflected throughout European stock markets and on the Euro, and we expect to see this continue through the summer.

Posted by Clifford on 05.26.2010

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