Investment Contrarians

European Debt Crisis

The European debt crisis refers to Europe’s inability to pay the debts it has built up in recent decades. The European debt crisis grew out of the U.S. financial crisis of 2008–2009, when a slowing global economy exposed the unsustainable financial policies of certain eurozone countries.

The European debt crisis can be traced back to October 2009, when Greece’s new government admitted its budget deficit would be double the previous government’s estimate and would hit 12% gross domestic product (GDP). After years of uncontrolled spending and non-existent fiscal reforms, Greece was one of the first countries to buckle under the economic strain.

Three years later, the European debt crisis is pushing the 17-country eurozone toward recession and is helping to drag down the global economy. Ten European countries have already slipped into a recession; three more have needed to be bailed out in order to avoid default; and seven European countries have changed leadership because of the crisis.

Greece reneged on $133 billion in debts. In Spain, where the unemployment rate is 25%, there have been general strikes and civil unrest. In France, the European Central Bank (ECB) injected more than a trillion dollars into the system to rescue three of the country’s largest financial institutions.

In fact, in an interview with Sky News in October 2011, the head of the Bank of England, Sir Mervyn King, referred to the European debt crisis as “the most serious financial crisis at least since the 1930s, if not ever.”

Bailout Insufficient: Spain Will Need More Money

By for Investment Contrarians | Jun 15, 2012

I’ve penned articles recently describing how the European debt crisis began. Too much debt needs to be paid back. Not only do the southern countries in Europe not have any money to pay it, but also the global economic slowdown is reducing government revenue, moving up the timetable of the European debt crisis to today.

One month after denying that Spanish banks would need a bailout, Spain’s leaders asked the European Central Bank (ECB) for money. The bailout currently stands at 100 billion euros. It is not going to be enough, as the European debt crisis deepens.

Spanish banks hold 400 billion euros in mortgage-backed securities (MBS), but the value of those securities is diminishing fast. The bailout of 100 billion euros might be sufficient if Spain’s economy grows again and the housing market stops falling. Of course, the housing market has a greater distance to fall, because, like the U.S. housing market, prices reached lofty levels that were completely unsustainable.

With the European debt crisis, there is no chance Spain’s economy will stop falling and magically start growing again. As a matter of fact, the economic contraction in Spain will only get worse, because the European debt crisis is deteriorating—and fast.

The unemployment rate in Spain is currently 24.3%. That is one-in-four people in the country who are unemployed. Youth unemployment is over 50%: one-in-two young people are unemployed. Just-released figures showed that the poverty levels in Spain have continued to worsen. Twenty-five percent of the population lives below the poverty line, as the European debt crisis prevents job creation and growth.

With this backdrop and the continued European … Read More

Europe: Spending Party Reaches an Abrupt End

By for Investment Contrarians | May 29, 2012

The European debt crisis will affect the U.S. economy and the U.S. stock market. There are those who believe that our trade with Europe is so small that the European debt crisis will not weaken our economy. It’s true that our exports to Europe are a small portion of our total exports; however, our large multinational corporations derive a significant portion of their revenues from Europe.

Roughly 40% of all corporate profits in the S&P 500 come from overseas, and just a glance at the headlines of the latest earnings reports of those companies illustrate how much the European debt crisis is affecting their bottom line.

Secondly, China’s largest export market is Europe. Since the European debt crisis, China’s economy has slowed considerably. China’s growth affects the rest of Asia, which will impact the U.S. considerably.

Therefore, for these reasons, I would argue it is important to understand the European debt crisis.

Before the European debt crisis and before the 17 countries came together under one currency, Greece, Portugal, Ireland, Spain and Italy ran their own countries. The interest rates paid on the debt issued by these countries were very high as compared to countries like Germany, Austria, and the Netherlands, because southern Europe was not as efficient as northern Europe.

The money Greece, Portugal, Ireland, Spain and Italy were able to borrow was limited by high interest rates and by the amount of debt they carried. The bond market made sure of that when these countries were independent, which is why there was no European debt crisis.

When these countries entered the euro, they suddenly had access to a … Read More