Friday, March 29, 2024
 
Columnist
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"Many investors are asking whether Greece will go bankrupt, whether this crisis could be as bad as the Lehman Brothers fiasco in 2008, and what are the possible implications on markets."

A picture says more than a thousand words
20/06/2011


Many investors are asking whether Greece will go bankrupt, whether this crisis could be as bad as the Lehman Brothers fiasco in 2008, and what are the possible implications on markets.

In order to understand the issue thoroughly and to anticipate and prepare for whatever developments investors need to understand the present trajectory of debts and deficits of Western nations across the board.

And it is not just Greece, or even the grouping Greece, Ireland, Italy, Portugal and Spain, but also France, Germany, Britain and the United States.

It has been projected by Standard & Poor's since March 2005 that even France, Germany, Britain and the United States at the time still widely believed to be the strongest countries are all heading in the direction of junk status.

It should be quite clear even to the casual observer the 2008 financial crisis and the subsequent PIIGS crisis have worsened the balance sheets of these four countries through expensive bank bailouts and stimulus packages.

What is most important to understand are two matters: First, it is a widely held concern in financial circles that a Greek default could trigger the bankruptcy of Portugal and Ireland within days, and that one of the great euro proponents, European Council president Jean-Claude Juncker, has admitted such contagion may also hit Belgium and Italy very fast, even before Spain.

With Italy's debt standing at 2 trillion euro (HK$22.3 trillion), such contagion will accordingly be catastrophic and clearly the worst nightmare of eurozone politicians and central bankers.

The relationship between Greece's woes and those of the other PIIGS' states can nicely be seen when looking at the yield on two-year sovereign bonds of these countries.

Since a rising yield implies a rising default risk, Thursday's steep yield rise provided a good example. It affected each of the aforementioned countries at the same time, and has brought Ireland's and Portugal's yields to close to 13 percent, which is clearly unsustainable, even without a Greek default.

Second, to ease fears of a domino-style collapse, eurozone politicians may well agree to further bailouts as opposed to solving the problem.

Ultimately, however, they will just only be gaining a bit of time, simply because even the perceived stronger countries are in fact already facing budget deficit or debt crises of their very own.

German Finance Minister Wolfgang Schaeuble has even said Germany is ``not swimming in money but drowning in debt.''

And if history is any guide, what usually happens when major countries lose control of their debt is that they seek to reduce or erase their unserviceable burden via inflation, through money printing now called quantitative easing.

Accordingly, investors should be braced for potentially turbulent times.

To avoid leverage and debt/mortgages to reduce investment risk, investors should be aware that Western government bonds and cash may NOT be the safe heaven asset classes this time - unlike in 2008.

They possibly carry more risk, due to the rising inflation outlook, foreshadowed by unsustainable debts and deficits in those major countries.

An unleveraged portfolio that is diversified across different asset classes, with a focus on precious metals, commodities and various investments across Asia and other relatively more healthy economies, appears to be the best strategy.
 


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