The Bonds and the Banks

Greece isn’t Ireland. That’s clear.

Six months ago the global equity markets fell by almost 20% in the wake of the Greek debt crisis. Now, with Irish banks threatening to take down another EU government, the markets have declined maybe 5%. What’s the difference?

One big difference is the nature of the debt. Bank debt is private. It’s never enjoyed the assumption of being risk-free. There’s an implicit assumption that government debt is the perfect credit. Even though tax-evasion is a Greek national sport, and hair-dressers draw a full government pension at age 50 because their work is "arduous," investors buying Greek debt entertained the fiction that this credit could not default.

When Greece disclosed that its deficit was 13% of GDP and its debt came to 200%, that assumption was revised. But the Irish don’t play catch-me-if-you-can with their revenue service. They don’t retire at 50. They do give tax-breaks to pub-singers and poets, but their major problem is the banks. Their banks made real estate loans, and when the "Celtic Tiger" stumbled, crashing property markets wiped bank equity. Now they need Euro-TARP because these banks are bigger than their economy.

So for all their Celtic pride, the Irish will take the bail-out money and shore up their financial system. In the US TARP was a spectacular economic success. Temporary capital infusions shored up confidence in a shaky system and prevented a financial meltdown. There’s no reason to expect otherwise from Ireland.

Sometimes the best way out is by offering a hand up. It looks like the Europeans have seen this.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-01-08T15:55:18+00:00 November 22nd, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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