Did anyone really believe that the Debt Crisis in Europe was res11-01-2011 |
Judging by the market’s overwhelmingly positive reaction last week to the announcement of a rescue package on the part of European leaders for the ongoing saga with Greece, one would have thought that Greece was the only obstacle preventing the stock market from moving higher. While we believe that there are still many other headwinds (Ex. jobless claims, high unemployment, weak consumer spending, lackluster real estate market, rising commodity prices, etc…) confronting the economic recovery and stock markets, this European dominated market sentiment was confirmed this week as the markets have now given back approximately 500 points (at the time of writing this post) of their recent gains over renewed concerns that the terms of the most recent rescue package may not be accepted by the Greek government and/or be enough to prevent further contagion and fully stabilize affected European banks. It remains our contention that solving the overall European debt crisis unfortunately is not that simple.
To start, the European Union (EU) shares a common currency – the EURO. Having such a common currency is/was believed to make it easier for the associated European block of countries to withstand severe periods of global credit tightening. While this may have worked sufficiently through the great credit crisis of 2008-2009, this common currency and shared economic base is experiencing strains coping with fiscal problems of one (or now many) of its underlying constituent countries.
Further, an ultimate default on Greek debt has been deemed inevitable by many market professionals for over a year, despite multiple bailouts. As opposed to having Greece deal with its own debt issues, using their own fiscal, monetary and currency, measures, EU countries now have to coordinate the opinions of the 26 other member countries and factor in the implications on 27 different economies and cultures with a single, coordinated currency and interest rate framework. Characterizing the resolution process as complicated is an understatement.
Based on all of the research and information available to us at this time, we, at Hennion & Walsh, believe that; a) Greece debt defaults will likely occur, b) Europe, and the P.I.I.G.S. countries in particular, will continue to dominate the headlines in the 4th quarter of 2011 leading to more global stock market volatility, c) the EU will ultimately agree upon a coordinated means to prevent significant contagion into other constituent countries (which could support future short-term rallies in the Equity markets), d) European banks will not suffer significant losses and e) the likelihood of Europe, in and of itself, pushing the world into a deeper recession will diminish although global credit markets will still likely remain tight for an extended period of time.