Stephenson Home Meet Stephenson Stephenson Commentary Stephenson Videos Stephenson Media Stephenson Blog Stephenson Commodities Stephenson Book Press Stephenson Speaking Stephenson Contact
flash
 
Commodity Investing Shell Shocked
 
Recent Tweets
 

Bailout Band-Aid
New York: May 10, 2010
By John Stephenson

A week ago, the problems with Europe 's debt-ridden economies seemed a long way off. But after simmering for months, the Greek debt crisis has once again ignited fears of a broader economic calamity facing Europe . Caught between a rock and a hard place, the European Union had little alternative but to bail out a struggling Greek government that faced certain bankruptcy in just a few week's time, unless they got a helping hand. And yet the announcement of a massive $144 billion aid package has done little to calm investors' jittery nerves over a deepening debt crisis.

As concern mounts, bond yields have surged and currencies and stocks are being sold as investors begin to believe that the worst may be yet to come . And while the bailout band-aid that Greece received was massive, it was never meant to be a cure-all for its chronic financial mismanagement. Investors are terrified that the crisis facing Greece has the very real possibility of spiraling dangerously out of control and possibly dragging down the entire European Union.

Over the past week, the Euro dropped to a 13-month low against the dollar and investors slammed stocks globally as they reasoned that Greece may be just the first shoe to drop in Europe . Making matters worse is ongoing rioting in Greece , a situation which has raised doubts that the country's bailout will succeed. Rating agency Standard & Poor's (S&P) cut Greece 's sovereign debt rating to junk status because of the country's high level of debt, inflexible labor market and complete reluctance to show strong fiscal discipline. Greece is laboring under a budget deficit of 13.6 percent of GDP. Spain and Portugal also received rating downgrades from S&P because of their sluggish growth prospects and high levels of debt.

In the wake of the downgrades, investors have sold the bonds issued by those countries en masse, driving up their borrowing costs and potentially increasing the future bailout bill that the European Union will have to finance. And while Greece may be the most profligate of the euro-zone countries, they are by no means alone in having an inflexible labor market, a culture of entitlement and a coddled public service hell-bent on defending their wages and benefits. If foreign investors turn their thumbs down on the fiscal futures of other countries, the cost of a broader European bailout could easily top one trillion Euros potentially destabilizing the union.

Others have suggested that by simply kicking Greece out of the European Union and forcing it to default on its debt—a move that would certainly usher in a Greek depression—might have been a simpler alternative to a bailout. But that view misses a critical point—that much of Greece 's euro-dominated debt is held by banks within the euro-zone. Kicking Greece out of the European Union might have appealed to the German electorate who wanted to punish Greece for spending so frivolously, but it would only have resulted in the EU having to bail out the region's banks as opposed to a single country that is only 2.5 percent of Europe 's economy.

Faced with the prospect of a cascading and chaotic series of government defaults, the Germans and indeed the EU had little, if any, choice but to bail out Greece . Prior to the announcement of the bailout package, two-year Greek government bond yields had soared toward an eye popping 20 percent. The bailout package, while clearly a band-aid solution, has bought Europe some time to get its act together.

The conditions whereby Greece was granted this interim financing package require the implementation of severe austerity measures, a move that has angered the heavily unionized labor market. The reform program requires Greece to cut its budget deficit from 13.6% to 2.7% of GDP in just three years time—a herculean feat for a shrinking economy. The official unemployment rate has risen to more than 11%, but in Greece , many women unemployed are reluctant to register as unemployed, suggesting that the true level of unemployment is much higher. The bloated public sector will need to be trimmed by more than 100,000 workers by the end of 2013—by a government that came to power promising “more social protection.”

With a strong likelihood that the EU will have to once again bail out a member country the inescapable conclusion is that much of the Western world is mired in debt. Not only is most of the West in hock, but they face decades of sluggish growth and higher health costs to support waves of baby boomers that are starting to retire. The reality for most governments is that a tidal wave of debt can only be managed by reneging on their promises, cutting services, raising taxes or printing money.

And while turning on the printing presses is not an option for Greece as part of the European Union it is a realistic path forward for both the US and UK. Investors concerned about the health of governments throughout the West, should consider an investment in gold or gold mining companies. Gold and commodities generally should ultimately be huge beneficiaries of the global instability.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
Join Me
Twitter
YouTube
Facebook
 
Home | Meet John | Commentary | Videos | Media | Blog | Commodities | Book Press | Speaking | Contact
© 2011 - 2012 John Stephenson. All Rights Reserved