A Greece default?
You will have heard me mention the Greek sovereign debt problem before. In February, this issue has been weighing down the markets somewhat pending a response from European Central Bank. Last Thursday, a serious contagion forced ECB to response seriously with a huge EUR750 billion safety net to arrest the fiscal crisis and stop the turmoil from spreading to the other 15 nations that use the euro.
Bank of America – Europe Bailout
Markets have been really volatile last 2 weeks due to this issue, other issues like China’s property prices and inflation do not help in calming the market. Main story goes, after the drop last week, traders and investors gave positive response and the markets for fixed income, equity and Euro rebounded on Monday, a day after hard fought European lifeline.
However, seems like prominent economists are convinced that without major political and fiscal changes, the plan will be effective in the long run. Eventually, this will lead to default.
The 3 things that need to happen is clearly explained by Paul Krugman in Greek End Game
Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began believes that sovereign debt from the developed countries will lead to higher inflation or government defaults. Roubini Says Rising Sovereign Debt Leads to Defaults (Correct)
Another more in depth explanation by UBS senior economic adviser George Magnus. An existential crisis for the euro-system
Invest mostly in Emerging economies more than developed countries
this means that a serious issues with sovereign debt of certain developed countries. The temporary measures are necessary to prevent the world from tipping into a second recession. However, it is not enough. One day these countries will enter into serious growth issues or inflate their currencies.
The world has changed now. The emerging economies have such a stronger financial position compared to developed economies, it seems incredible. Many developed countries now have the financial position of Argentina 20 years ago and the emerging economies, opposite. In terms of investments, OECD countries, in my view has become tactical allocation instead of core allocation.
Sovereign Bonds
Sovereign bonds of developed countries with budget deficit and high debt to GDP ratio will increasingly be under pressure as investors demand a higher interest for the greater risk involved. This will play out over the coming years.
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