The good news is that it isn’t raining as I type this. The bad news is that the world’s largest economy is showing signs of trouble and some market watchers now fear that sovereign debt issues in the European Union will unleash another global credit freeze, bringing forth the dreaded double-dip recession that governments and central bankers around the world have so desperately tried to avoid.
On the morning of May 31, European stocks were moving sharply upward on speculation that the EU and International Monetary Fund will provide more aid to Greece, which can’t afford to pay its bills or debt. But sovereign debt experts at Toronto’s Recovery Partners insist further attempts to prevent Greek bondholders—which include the European Central Bank and financial institutions in Germany and France—from taking a haircut appear to be making the debt problem worse by kicking it down the road.
According to a market commentary issued by Recovery Partners CEO Alex Jurshevski, “the reality here is that the IMF/ECB debt restructuring initiatives undertaken over the past year on behalf of Greece are unraveling.” The strict adherence to a “no haircut” position, he says, shows the EU has no Plan B. And that, in combination with the inability of the Greek government to rally domestic political support around a common negotiating platform, “implies that there is a growing risk of an uncontrolled default resulting from this very serious situation.”
If Greece defaults on its debt, influential U.S. advisor to the rich John Mauldin insists the resulting financial crisis will not be any more contained than America’s subprime mortgages fiasco in 2008. On Yahoo’s Daily Ticker, the Texas-based market watcher recently stated that he also thinks the EU has lost control of the Greek debt situation. He warned Greek banks may soon have to be nationalized while Greek citizens are forced to take their bank deposits in drachmas, instead of euros, losing half their wealth.
According to Mauldin, Greek consumers and businesses would then default on all debts, forcing the EBC and banks in other EU nationals to write-downs Greek exposure. And since U.S. banks have credit-default swaps with European banks, there is good possibility international banks will lose confidence in so-called counterparty risk and simply stop lending to each other as they did in 2008, crashing the world financial system.
Meanwhile, even if the EU avoids a default, the U.S. housing market is back in the basement, with pending home sales down 11.6% in April and consumer confidence at record lows for this period in an economic expansion. “Cooling off,” says a market report by David Rosenberg, chief economist with Toronto wealth manager with Gluskin Sheff. “That is the best way to describe what is happening to the U.S. economy.”