Another Greek Tragedy?

29th April 2010

Just as it looked as if the worst of the great banking panic had ended, the European economy finds itself uncomfortably in the edge of a precipice once again.

Yesterday, in a dramatic and unexpected move, ratings agency, Standard and Poors decided to reduce Greek Government debt to mere ‘junk’ status’. It also lowered its credit score on Portugal. Markets and the euro currency took fright at the move with Banks bearing the brunt of the sell of.

The worry now is that this fiscal crisis goes well beyond Greece and analysts are looking at Spain to becoming the next target for serious devaluation in its economic standing.

"Make or Break"

We are now entering ‘make or break’ territory for Greece and perhaps more importantly the wider Eurozone. Markets are looking to the prospect of a decent restructuring package for Greek debt and Greek bonds are starting to become attractive to emerging markets and distressed debt investors.

Although a Eurozone and IMF rescue plan has been put forward it is very dependent politically and financially on Germany. Chancellor Merkel is likely to demand much tougher measures than those already implemented by the Greek Government and the unrest within the public service sector in Greece is causing more headaches.

It is incredibly difficult to see a viable exit for Greece from the position they find themselves in.

• One option is to admit that Greek debt is virtually worthless and the European holders of the debt will have to accept a severe price reduction. The problem here is that many will not want to take another big hit on their loan books so soon after the credit crunch.
• The second and more radical option is to take Greece out of the euro altogether – perhaps the drachma will make a dramatic reappearance.
  

UK Deficit Worries

Whilst it is hoped that the UK is no where near this type of situation one cannot underestimate the ongoing problem of the UK deficit, racked up by the relentless Quantitative easing over the last year.

Presently there has been no clear plan presented by any of the political parties as to how they are going to address this and one worry is that if we do have a hung parliament we will encounter political deadlock after the election.

The current Eurozone problems should serve as a warning to the UK that skirting the deficit issue is a dangerous game to play.

How is Carrington taking action?

As far as funds are concerned we are keeping a close watch on all European funds. The problems look set to continue and we are considering switching clients out of this sector.

We will be emailing clients who have these holdings so please keep a close watch for our emails as we will need our clients to confirm that they are happy for us to make the switch.

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