What’s up with Greece?
A stable, orderly debt restructuring has become disorderly and unsafe. And while the Greek government claims to have the cash to meet its austerity targets, the statistics say otherwise: their economy is falling into a deeper recession, and deficits are widening. German Prime Minister could sport a sign that reads, “I lent Greece $150 billion Euros and all I got was this lousy t-shirt.”
Rising concern about a default prompted investors to dump the banks known to hold the most Greek debt. Moody’s put three French banks on watch for a downgrade, and those banks tumbled 10%. There are rumors that the banks could be nationalized. The Germans are mulling a bailout package for their banks. German bunds rallied; the bonds of weaker nations sold off.
Europe is at an inflection point: they either adopt greater fiscal union, or the pressures become too much and several weaker players leave. The major problem is the lack of leadership: Merkel can barely hold her coalition together; Sarkozy is a lame-duck leader; Berlusconi has squandered most of his credibility; Christine Lagarde is just too new to the scene. Who else in the EU has the stature to present a compelling vision for further integration?
If Greece leaves the Euro, it won’t necessarily mean the end of the EU. But it will cause the mother of all financial crises in Greece, one that may spill over to the rest of Europe. I’ve been in turns a Euro-skeptic and Euro-supporter. I continue to believe that Europe will muddle through. But the times, they are a’changing.
Douglas R. Tengdin, CFA
Chief Investment Officer
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