Stock markets around the world surged dramatically last week with the news of the European Union’s Grand Plan (their name for it) of forgiving 50% of Greece’s sovereign debt. At first blush, it sounds like the sovereign debt crisis in Europe has been solved with this one decisive step. Reality is this will likely keep the euro alive for the next few weeks until the next crisis occurs.
I could bore you by explaining the three main elements of the plan: 1) the bank recapitalization proposal; 2) the Greek write-down of 50 percent of its debt; and 3) the proposed fund and leveraging system that is necessary to make it all work. Most of the details of how this is to be implemented have not yet been decided. It will take weeks to flesh out this plan.
But I can already envision you with a glazed look in your eyes trying to make sense of the preceding paragraph so what’s the point? And quite frankly I don’t blame you. It’s complicated!
So let’s break it down into bite size pieces that we can all understand.
1. The European sovereign debt crisis is not going away anytime soon. It is truly a crisis of epic proportion. There are no easy solutions. All of the possible alternatives to solving this crisis lead to a European banking crisis of varying severity. Shown below is a simplified but accurate version of the choices Europe can make to get through this crisis.
This chart by STRATFOR reminds me of one those convoluted Rube Goldberg-like mouse traps. Unfortunately you’ll notice that all paths lead to the same outcome: European Banking Crisis.
2. It is going to require someone to step up and boldly lead at a time when statesmen are few and far between. It will also require a good amount of old fashion luck to make the right decisions because the path through this mess is not readily apparent.
3. You might be thinking, “Who cares about the Greek debt crisis? How does it affect me in the Pacific Northwest?” It is important to us because how well the Europeans handle this crisis will determine how significant an impact it will have on the world economy. You can already see how the stock markets of the world are reacting to any news good or bad about this crisis. More importantly will be the effect on our European trading partners. If their economies are adversely impacted it will adversely impact our exports, which means our economy will be affected.
Some may accuse me of being Chicken Little shouting, “The sky is falling” when in fact things are improving. Isn’t there evidence of an economic recovery in the U.S., albeit ever so slowly? Yes, thank goodness. But if we ignore the banking crisis in Europe we do so at our own peril. Now’s the time to think through the ramifications of how this crisis could impact you.
In some respects we are quite fortunate being in the commercial real estate industry as we are part of the solution for our clients to this crisis. If things progress over time as I expect, people will continue taking their money out of the stock market because of volatility and possibly because of declining stock prices. And the interest rates on bonds will continue to be meager. What’s left over to invest in? Commercial real estate, that’s what. The next decade could see the return of investors in a big way coming back into our industry.
Source: Agenda: Issues Remain for the Eurozone Despite Its Grand Plan; STRATFOR, by Peter Zeihan, October 28, 2011.