Markets, commodity prices, and growth related currencies rebounded last week on the back of good news when the Greek Parliament passed the latest austerity package. Finance ministers of the eurozone signed off on a new bailout package that paves the way for Greece to receive US $17.4 billion in additional aid.
On that news, European stocks rose, extending the biggest weekly gains for the Stoxx Europe 600 Index in a year, while the MSCI Asia Pacific Index jumped more than 1.3 percent. The US market had it's best week in 2 years.
But is all really well in Greece? If so, why did S&P slap a default rating on Greek debt? Might the ratings agencies finally be ahead of the curve on a credit issue?
Yes, Greece has dodged a bullet for the time being, and markets yet again avoided another financial meltdown. But the question is, for how long? The drama never seems to end, and we are by no means anywhere close to a comprehensive and sustainable solution for Greece and it's massive debt load. The clear and present danger of default risk remains.
The measures that have been agreed with the European Union and the International Monetary Fund are at best temporary and short-lived. These measures will be ineffective as long as there is a lack of political will and a clear end game resulting in the restructuring of Greece’s debt. The latest actions are short term a short term patch. The latest efforts are, in my opinion, vain attempts by authorities to solve Greece’s fiscal problems with financial gymnastics. WRITE DOWNS MUST OCCUR EVENTUALLY.
The Greek economy is set to shrink 3.75% this year, and will show only marginal growth in 2012, according to the European Commission’s quarterly report. This study notes that “additional fiscal consolidation and liquidity constraints are taking their toll on the economy.”
The need to implement painful structural reforms such as fresh tax rises and spending cuts is likely to worsen political and social tensions. It's clear that Greece cannot grow out of its problems. GDP cannot accelerate faster than the mounting debt load.
What current measures WILL do is isolate the disease … for now. Still, the cancer remains. What has been put in place is an effort by the EU and the IMF to cordon of the European banking system and limit the possibility of contagion the Greece problems may have on the rest of the world. And in the fragile state that the world economy is in, that's not a bad outcome.
Markets will rally as Greece avoids a default… for now. Soon, markets will once again be on edge, wondering when the next bailout will be, and in what shape or form. The EU and the IMF will continue to keep theball rolling for as long as they can.
What seems to be clear is that Europe, at all costs, does not want to unleash another financial crisis Lehman style, and neither does it want to let the eurozone fall apart.
Greece had more than a year to implement a meaningful restructuring. But it simply did not happen as needed. Frankly, it is just a matter of time before similar scenes from this week get played out again down the road. As we learned from the Latin American debt crisis, recovery only happens when hard realities are faced.
Reality dictates WRITE DOWNS. When you read about that happening, then you will know that tangible steps are being taken to address the core problem; too much debt and too little revenue. It is really that simple.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Founded in 1986, YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutional investors and individual investors. The firm works with clients around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009 and 2010. He oversees all investment and research activities of the firm and is actively engaged on a daily basis in the firm's securities analysis activities and determines the macro tactical asset allocation weightings for client portfolios. He works with YCMNET's investment team in integrating behavioral investing strategies with the firm's core fundamental perspective. Michael holds a Ph.D. in education, other advanced degrees, and holds the Certified Financial Planner® (CFP) designation.