The global economy has boomed over the past several decades for one reason: borrowing. Every country in the world carries an enormous debt load. Debt in one country is purchased by other countries, while those other countries sell their debt to others countries. It’s one big spider-web of borrowings that has gotten wildly out of control.
Meanwhile, every government jams its head in the sand and pretends it is all sustainable. When one country finally gets so bad it has to institute austerity measures, the people hate having to experience all that goes along with it, and votes in a government that sells the irresponsible policy of getting a bailout, cleverly disguised as “debt reduction.”
So it goes with Greece.
The radical left-wing Syriza party won the election, on a platform rejecting austerity and focusing on cramdowns of the country’s creditors. It got so ridiculous that Syriza’s candidate repeatedly demonized Germany’s leader, Angela Merkel, for daring to support the notion that Greece actually suffer through austerity in exchange for a 240-billion-euro bailout.
Syriza has now concocted a showdown with what’s called “the troika,” consisting of the IMF, European Central Bank, and European Commission. The troika has inspectors that are supposed to review Greece’s austerity progress. If satisfied, Greece gets cheap financing and its banks get cheap funding from the ECB.
Except Syriza doesn’t recognize the troika’s authority, and when a 7-billion-euro loan from the ECB is due this summer, Greece isn’t likely to have the money to repay it.
So who blinks? With Syriza thumbing its nose at the bailout’s austerity requirements, the only route is for Greece to just leave the Eurozone. That will require Greece to return to a national currency, and lose monetary support from the troika. While Greece is small, it could create a contagion, encouraging other countries to do the same, cratering the euro, and creating havoc in the currency and financial markets.
This all occurs as the Athens stock exchange is already down 20% in recent weeks, and it fell another 7% so far this week. Greece’s bond yields have spiked above 9%, as investors sell off the bonds. The euro fell again, closing in on the one-for-one U.S. dollar exchange rate.
This comes in conjunction with the ECB’s own quantitative easing program, partially instituted to help contain any contagion, but which will likely have the same effect on European markets as the U.S. plan did – namely, lowering bond yields so much that it will force investors in stocks to seek higher-yielding investments.
What does this mean for you, the U.S. investor? It suggests that if you are going to invest in Europe that you have a long-term horizon. There is some merit to investing in a broad basket of European equities, such as the iShares MSCI EAFE (NYSE:EFA), which has bounced off its 52-week low. I would buy in now and be prepared to average down.
Another move is to buy the WisdomTree Europe Hedged Equity ETF (NYSE:HEDJ), which gives you exposure the biggest and best brand names in Europe but is hedged against the euro in case it craters.
You may also consider going long the U.S. dollar by purchasing the PowerShares DB US Dollar Bullish ETF (NYSE:UUP).
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