Wednesday, February 28, 2024
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group
"We were alone in 2008 in warning that Greece was a landmine ready to blow up anytime and that the euro could fall apart soon."

It ain't over till the fat ladies sing

We were alone in 2008 in warning that Greece was a landmine ready to blow up anytime and that the euro could fall apart soon.

Our view was belittled at the time. Then, the euro-zone crisis blew wide open and Greece became the buzzword of almost every market discussion for years to come.

One could see the Greek crisis coming when looking at debt ratios, the shape of the economy, and as a more immediate indicator, changes in sovereign bond yields, that is, a rise in yields, which may be slow at first but can accelerate fast and move out of control.

An adviser to Bill Clinton once famously said that he would like to be reincarnated as the bond market because then you can intimidate everybody.

It appears to be often overlooked that it is in fact the bond market that lies at the heart of a country's finances/financial system (much more so than the stock market), and hence one has to watch bonds for upcoming signs of potential crises.

Today we are alone yet again in warning that the worst of the euro zone crisis is not behind us but still ahead, although we acknowledge that this is currently not a fashionable thing to say, it is supposed to be common knowledge nowadays that the worst is over.

In reality though we are afraid the problems have only become bigger since the initial crisis broke, and shifted to larger countries (partly beneath the surface so far).

Now, in particular, Italy appears ready for a Greek-style blow-up, and this is a country simply too big to be bailed out.

Bad debts at Italian banks have recently risen to their highest level since records began in June 1998, up 22.3 percent from last year, as the country struggles with its longest recession since World War II.

And sovereign bond yields have lately been picking up again including in Italy, Germany and the world's largest two bond markets, the US and Japan.

It will be interesting to see how those countries already struggling with an unsustainable debt burden are now going to deal with a rising interest rate environment. What the effect on their debt-to-GDP ratios will be, and how many of them will end up like Greece (or Cyprus) in the process.

For Greece, by the way, that crisis isn't over yet either, with the IMF just having noted that it does not see any progress and a risk of a new crisis escalation in the country.

So it appears likely that not just one but possibly quite a few fat ladies are still going to have to sing before this debt crisis opera for the euro zone - and much else of the developed world - is over.

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