Monday, May 14, 2012

Europe Debt Saga

Global markets were once again faced with selling pressure due to the European debt crisis.  Just outline 3 probably hottest issues surrounding the European debt crisis.

1. Greece after last week of Election still yet to form a Government as no political parties won majority seats and formation of a coalition government has failed in the last 3 attempts as some political parties resisted the austerity measures Greece need to swallow in order to get bailout funds.  Should this week Greece still unable to form a government, they will have to hold another election in June.  Talk about Greece exiting Euro ( default ) also surfaced.  While that possibility remains high as of now but that should not be a chaotic event.  Greece to exit Euro is good for the Geek in the long run so that they could rebuild their economy at their own pace.  Short-term wise, global markets might feel the selling pressure as private investors and banks that invested in Greek's bond will probably have to default, write-off assets and in need of selling other assets to recover the damage.  Equity markets is no doubt the best place to selling off assets.  However, do note that global financial sector now is better much equipped with the buffer to absorb Greece default now than 1 or 2 years ago.  Hence, should Greece really exit Euro and default, it will not be a chaotic event so no point put your full focus in this event.

2. Spain or Italy getting bailout ? This is another tackling problem as Spain and Italy are the 4th and 3rd largest economy among EU nations and they are termed as "too big to fail".  Though the recent effort by EU and IMF to raise the firewall in the bailout funds, the amount of bailout it could handle is only either Spain or Italy and not both.  Should both also require bailout at the same time, that will create a chaotic event to the global financial sector.  Of the 2 countries, Spain has a much worse situation than Italy and investors might want to keep the option open of a possible bailout requirement by Spain.

3. Austerity vs Growth issue.  That perhaps is the most important issue among all the EU issues.  With EU nations adhering to the fiscal union pact and going into steep austerity measures to cut debt, this has impacted the economic growth with EU already in mild recession and not the mention the several EU nations are also in recession.  Austerity and Growth is always opposite of each other and because of that have seen couple of leadership changing hands for some EU nations with the most notable the new French President.  EU leaders themselves do realize the recession scenario in Europe and it is about time that EU leaders need to work out something to balance off between continue austerity to cut debt and at the same time spur growth.  This is something investors need closely monitor of as it will decide whether the EU debt saga hit a bottom  ( global stock markets hitting bottom also ).  The thing to look out for could be a speech, a comment, an action or an event and that will trigger a reversal.  The debate between austerity vs growth will not be smooth and be expecting to meet with stalemate along the ways.  What is important is ensuring all the EU leaders having the same frequency and consensus of the compromise actions that they need to carry out in order to find a convergence between austerity and growth.  EU leaders meeting, EU Summit, ECB's comment are some of the many events that investors could monitor for such a cue.  The earliest EU Summit is end of June and that should be closely watched.

Of the 3 issues above, Austerity vs Growth will be most important of all and that can decide whether EU can finally recover from the debt crisis.  Once issue #3 is in the correct direction, issue #2 should not be any issue any more.  Investors should focus on the correct issue and not get over panic by other minors.

For every crisis, there will be an opportunity.  No point focus on the gloom and doom and miss the opportunity.

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