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Putting Greece into Perspective

The Economist termed this past weekend’s emergency bailout package for Greece as “shock and awe” due to the size of the $146 Billion combined European and IMF commitments to the country. The widely read magazine went further to suggest that they hope the package will convince the markets that loan commitments will cover the potential bond losses and contain the issue from spreading into Portugal and, perhaps more dangerously, into Spain. This is now the third attempt at a solution for the sovereign debt crisis in Greece. Previously the Euro-zone leaders seemed to be trying to buy time but spiraling Greek bond rates, which intensified after Moody’s recently cut Greek bonds ratings to junk status, along with fears of the contagion spreading to Spain – which has a much larger GDP than Greece and Portugal combined – forced their hand.

The fear of contagion is the real concern here as future sovereign debt issues in other countries could put more pressure on the global banking system amidst a continuing tight credit market. Without contagion, the ultimate fallout would likely be contained to the country of Greece, several banks, predominantly European (see chart below), and the Euro. With respect to the Euro, which is now trading at a 14 month low vs. the U.S. Dollar, perhaps this is an opportunity for the Euro to pare down some of its weaker country components and implement stricter debt and spending standards (or perhaps better enforce their existing standards).

 

All of this reminds us, at Hennion & Walsh, of two things:

  1. The markets have rallied too high too fast, absent solid economic fundamentals, following the low of the most recent bear market that was reached on March 9, 2009. Hence, a pullback was inevitable, and perhaps the situation in Greece is just a convenient excuse for many investors to take some of the gains that they experienced over the last 12 + month period and re-position their portfolio for the next leg of this market recovery.
  2. The world is essentially over-leveraged and we should brace for the ramifications of similar issues that we are seeing in Greece in other areas of the World. This calls for investors to re-visit their portfolio strategies to incorporate a wider range of asset classes and sectors to help provide the diversification and risk adjusted return potential that is needed to navigate these uncertain and volatile markets.
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