Sunday 20 June 2010

Investment Note: 28/04/2010 - Beware Of Gifts Given To Greeks By Gareth Milliams

From Standard and Poors:

27/04/10
Standard & Poor's Ratings Services has updated its assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to place Greece's public debt burden onto a sustained downward trajectory.

We are lowering our ratings on Greece to 'BB+/B' from 'BBB+/A-2' and assigning a negative outlook.

The negative outlook reflects the possibility of a further downgrade if the Greek government's ability to implement its fiscal and structural reform program materially weakens in our view, undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume.

The Greek economic model was unsustainable. No country can maintain a public sector that employs 18% of its total adult workforce. The inevitable austerity measures will need to be harsh and implemented swiftly. The danger is contagion. The question to be asked is whether Greece is the new Bear Stearns?

The note below was written two months ago. It looks at Greece and the PIIGS and beyond. I thought it worth resending.

Beware of Gifts Given To Greeks

There are cracks appearing in the Eurozone. The Greek economy is in full tragedy mode and could collapse without an immediate financial injection. The rest of the PIIGS could easily follow, including G8 member Italy. The pressure on France and Germany to finance these bailouts is enormous. Therefore the question is this: “If they had to, could France and Germany continue to rescue other basket case economies within the Eurozone?”

The answer is, of course no. The problem is, is that within the Eurozone, there are only two tier one economies and the tier two nations such as Spain, Ireland and Italy look like being the next to topple.

In addition to Greece and Spain, we have smaller EU countries such as Rumania, Czech Republic and Bulgaria who also have debt issues. These countries benefit from the largesse of the leading economies. Can this continue if the PIIGS gobble up all the spare financial resources and if they are no longer recipients of EU grants and aid, what will happen to their economies?

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. The disadvantages now seem enormous. Previously, Greece could have devalued the Drachma, relatively reducing its labour costs and restructured its debt. Now it cannot. Its economy is subject to dictat from Berlin and Paris.

Instead, the Greek people face a period of vicious cuts in public services as they enter an enforced depression. The nightmare scenario is if the Papendreou government does not do enough and are forced to default. The issue then becomes one of contagion and Spain with its 20% unemployment is too big to fail and too big for Germany to refinance.

Tim Bond of Barclays Capital expands further:

‘The broad picture is that many, if not most, G20 economies are in a fiscal mess. This is not a problem merely confined to southern European nations. The aggregate of G20 government debt/GDP ration is projected (by the IMF) to reach 118% of GDP by 2014.’

Bond also points out demographics are a big issue. ‘The long-run fiscal outlook, due to aging, is extremely poor. In this respect, IMF projections point to advanced G20 government debt/GDP ratios rising by 50 percentage points of GDP over the next two decades due to aging”.

‘The broad picture is that many, if not most, G20 economies are in a fiscal mess. This is not a problem merely confined to southern European nations. The aggregate of G20 government debt/GDP ration is projected (by the IMF) to reach 118% of GDP by 2014.’

Bond also points out that demographics are a big issue. ‘The long-run fiscal outlook, due to aging, is extremely poor. In this respect, IMF projections point to advanced G20 government debt/GDP ratios rising by 50 percentage points of GDP over the next two decades due to aging”.

This is massive. As a financial adviser, my job is to ensure that my clients achieve the retirement that they aspire to. More than ever, it appears that there will be a massive disparity between planned and unplanned retirements.

I cannot emphasise enough that those who under invest into their pensions and lump sum portfolio bonds face the igmony of a disappointing retirement income backed up by a welfare system that will provide nothing of value.

The global economy can no longer sustain return based upon a mere promise of repayment. We are facing a future of massive deficits and low growth, of high taxes and low interest rates.

More than ever, we need to provide independent advice that considers the political and economic as well as the market dynamic.

I am beginning to believe that the days of early retirement for the wealthy pensioner are gone. With medical advances, my generation will live into their 90’s. Retirement at 60 will obviously require 30 years of income. Those unprepared and who depend upon the state will face penury, whilst even those who create a financial foundation will require steady and consistent management.

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