Big Fat Greek DeficitBy Fisher Investments Editorial Staff, 12/18/2009
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Global stock markets soured Thursday as growing concerns over the stability of Greek debt spread.
There's no telling how Greece will emerge or if their stated efforts to bring the deficit in line with EU standards will be effective.
Single nations (particularly little ones like Greece) can and will suffer even if the rest of the world is generally recovering.
Wednesday evening, Standard & Poor's became the second major credit ratings agency to downgrade Greece's sovereign debt—also including a warning of further downgrades if the country doesn't take significant strides toward closing a massive budget deficit (estimated at 12.7% of 2009 GDP—far exceeding the 3% euro-zone limit, and the highest among fellow members). Strikes began as the Greek government announced plans to sell off state assets, limit public sector pay-raises, and take other aggressive measures to cut the deficit significantly.
In response to Thursday's news, global stock markets were down nearly across the board. Spooked by what a Greek credit default could mean for the euro, investors sought higher quality investments backed by the world's dominant economy (contradicting the fears, common all this year that foreigners no longer found the full faith and credit of the US all that credible). US Treasuries rallied and the US dollar hit 3 month highs as the euro dropped nearly 1% against both the US dollar and the Japanese yen.
There's no telling at this point if Greece's stated efforts to bring the deficit in line will be effective. Relative to other EU countries, Greece is more heavily dependent on government spending and has a big, ready-to-strike public sector. Public spending can only be cut so far, and borrowing costs are rising dramatically, with Greece currently paying 2.5% more interest for 10 year bonds than Germany. It remains to be seen the levels to which fellow members intervene in an attempt to backstop further deterioration in the Greek economy and protect the union. (But it still seems unlikely they'll let Greek woes demolish the euro.)
Troubles in Greece are real. And investors shouldn't be surprised by other similar examples of sovereign weakness in the wake of such an extensive recession and global credit crisis. The world is more correlated than many think—but single nations (particularly little ones like Greece) can and will suffer even if the rest of the world is generally recovering. This doesn't have to derail the bull market, but it certainly can spike near-term volatility.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.