New York 2-26-10
The country that brought us so many great things that I couldn’t even begin to list them. A nation of peaceful yet spirited people, a land of immense psychical beauty and yet is only the size of Tennessee. Has been the center of attention in and out of the Euro zone, from the boardrooms in Frankfurt to the trading floors in New York this tiny country is perceived as a threat to Global Financial Markets.
Of course it all started when Greece joined the Eurozone Its Government failed to reform the economy and reduce public spending, including the huge military budget. Greece entered the recession ill equipped to cope. Government debt was bigger than the economy last year and is forecast to exceed 120 per cent of GDP this year. It needs to borrow €50 billion this year to pay its bills but its credit rating has been cut to just above “junk” level so it must pay much higher interest on its borrowings than other eurozone states. On April 20 it has to pay back €8 billion to bondholders. The question is will Greece default or will there be a rescue at the eleventh hour like with the Dubai situation. The financial markets are betting that Greece won’t make it and investors have turned their attention to other states on the eurozone periphery such as Spain, Portugal and Ireland, which are also burdened by big deficits. A rescue by the European Central Bank, the European Union, the International Monetary Fund or all three would constitute a big loss of credibility and cause the euro to fall against major currencies.
While this problem compared to past recent events seems small. The perception is if these situations are still popping up then maybe we really are not out of the woods just yet. Investors in the equities markets may like a lot of things, but uncertainty is not one of them. It was only 13 years ago that the1997 Asian Financial Crisis and 1998 Russian financial crisis contributing to the default of Long Term Capital Management. This caused the Federal Reserve to organize a $4.7 Billion bailout from the worlds’ top firms after all other options were exhausted. The fear was the default of one firm would cause a domino effect. Well once again many investors feel that they starring down the barrel of a cannon. Of course the logical course of flight to safety would be to the U.S Dollar denominated Treasury and Corporate Bonds. However markets are not always logical, I believe that other markets are much more attractive such as Australia which has been somewhat resilient to market downturns, or in the case of the last two years total meltdowns. One could take advantage of a declining euro by selling( Eur/Aud ) the Euro and buying the Aussie. While in my opinion I feel that someone somewhere will step in and bailout Greece. It never hurts to be prepared for the worst after all that is what trading is,preparing for the worst case scenario.
David A Moore