When the Dust Settles…

How about a pack of lies and deceit – squeezed into one paragraph – to finish off your week?

Here you go:

‘We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilise the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals…’

So reads the introduction to the statement by ‘the heads of state or government of the euro area and EU institutions’.

Although the eurocrat-speak might be gibberish, today we’ll have a crack at wading through it and seeing what it actually means for you.

The world of finance is now so interconnected that what happens on the periphery of Europe affects markets in Australia.

Firstly, let’s look at the main facts.

  1. Greece gets a new and improved bailout. The new rescue package amounts to €109bn. Private bondholders will apparently chip in by taking losses on existing debt of €50bn between now and 2014. This means Greece is in technical default. More on that below.
  2. The three countries most in debt servitude, Greece, Ireland and Portugal, will have their borrowing costs lowered to 3.5 per cent with the duration of bailout loans extended for up to 30 years.
  3. The European Financial Stability Facility, the eurozone bailout fund, will have its powers broadened. It will be now be able to buy the debt of Spain and Italy if bond yields in those countries rise to uncomfortable heights.
  4. The European Central Bank (ECB) has changed the rules on the types of collateral it will accept. Because Greece is now in partial default, ordinarily the ECB would not be permitted to accept Greek debt as collateral for ECB loans. But this rule no longer suits, because the Greek banking system would collapse without ECB support. So they changed the rules.

That’s the gist of the new program.

No one yet knows how any of this will be implemented. But the market is not waiting around to find out. It’s time to rally and embrace risk. When those who make the rules say they will ‘do whatever is needed to ensure the financial stability of the euro area’, you know it’s time to party.

How long it will continue though is the question.

When the dust settles, the market will come to the conclusion that the can has just been kicked down the road again, albeit a little better than in the past. The selective default on Greek debt has given the country some room to breathe. But according to the Financial Times, Greece’s €350bn debt load will only be reduced by €26bn by 2014.

Big deal. Greece will still be a debt slave for years to come. Ireland and Portugal will be too. There is no debt forgiveness for them as they promised their masters all debt would be paid back in full. That’s what servants do.

How, in the face of ongoing deep austerity measures, will these countries (and Spain and Italy) grow out of their debt burdens as planned?

They won’t.

We expect the market to focus on this issue when the current shot of adrenalin wears off.

And the bigger issue here is that the Eurozone is coming closer to being a transfer union. The EFSF fund now has expanded powers to buy the debt of any countries it thinks are in trouble. Little Nicky Sarkozy is calling it a ‘European Monetary Fund’.

It is a fund that pretty much uses the strong credit rating of Germany and France (courtesy of German and French taxpayers) to raise money and give it to weaker nations. That’s not how finance works. It’s now how risk and reward works.

It’s strengthening the periphery to weaken the core. It might not be apparent now, but this move will doom the euro and cause major political problems down the track.

In the meantime, party on!

And feel free to ignore China’s slowing manufacturing sector. A preliminary survey by HSBC showed industrial production in China contracted in the month of July.

The country is in all sorts. Inflation is out of control, as is the shadow banking sector and the property market. And now the engine room – manufacturing – is slowing. China’s communist leaders are about to get a lesson in how markets and the economy react to years of prodding and poking in a direction they would never have gone in unaided.

And feel free to ignore the manufacturing sector in Europe too. A report just out showed manufacturing activity ground to a halt in July.

The China slowdown is only just starting to have an impact on the rest of the world.

How long until the market notices?


Greg Canavan
Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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4 Comments on "When the Dust Settles…"

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Ned S

“How long until the market notices?” – I’ve been waiting patiently for six years for the world to end now. If it doesn’t end sometime in the next six, I’m gunna give up and become a bull – Grumble, grumble … :)


I beat ya too it Ned…buy the dip man ;)


Only six years Ned? I got out in 2002 not long before I was made redundant. Still think it’s too risky to dip my big toe on the water! Cashed up .. should be in gold? BUT at $1600 that’s a big risk too. Woe is me.

Good article Greg .. I think you have hit the nail on the head.


Ned you need to sit back and take in the big picture.

I’ve been waiting for this crash for over 38 years.

We began to prepare in 2001 when it became obvious we were getting close.

Cleared all debt, and cashed up into gold back when it was worth US$250.

We grow all our own and are now building a fuel plant.

If you’ve only been bearing for 6 years sit back turn the TV off and watch the ride this rock is about to begin.

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