Where is this crisis heading?

Gloom has taken over most of the investment outlook these days. What with the euro crisis so close to home, what with the dollar appreciation in spite of the mountain of debit which the USA owes, what with the mixed messages coming out from the IMF and the EIB regarding the Greek crises. All this news goes a long way towards making the outlook, especially for the short term, much more nebulous.

We can’t have Germany, the motor of Europe, say that they will never allow Greece to go bankrupt and slip out of the eurozone- Neville Curmi

Europe as a whole has a value of about $14.8 trillion, which would make it the biggest economy in the world, even larger than the US economy and bigger than China’s. So certainly one cannot ignore what is happening in the world’s biggest economy.

But we cannot on one hand have the IMF maintain that they will never allow Greece to renege on their debts and they will support this ailing part of Europe to the end. Neither can one have Germany, the motor of Europe, say that they will never allow Greece to go bankrupt and slip out of the eurozone. When now these powers are talking about organising a 50 per cent “haircut” for all Greek debt, and negotiating an orderly default! What next?

No wonder the markets do not know where to turn their heads, they are reacting to even the slightest negative in the news. Yes indeed this debt crisis, in Europe and America, is scaring the world.

The German Bundestag’s overwhelming support for expanding the European bailout fund is being recognised by some as a basic and fundamental key step towards solving the eurozone debit crisis. This may be so, but the mood of the market hardly reflects this view. What is the feeling of the Germans themselves in this act for salvation of the euro? What do the Germans themselves really feel about their role as saviours?

It is a fact that the German voters do not want to see more of their hard earned contributions to the state made available to other countries, even in Europe, which do not have the discipline of the power house of Europe, to even keep their own in order. This result in Germany may not have pleased the majority of German taxpayers. No one knows whether the money voted would be enough. The German tabloid Bild aptly captured their sentiment in one of its headlines: “How often, Chancellor?” Indeed how often? And will often enough be really enough?

We have heard talk that it may be a matter of time before Greece will have to bow out of the eurozone, get its house in order outside where fiscal control can be more directly applied, and then ask for readmittance, no doubt under a new Prime Minister and government. But is it Greece that will pull out? Or can you imagine Germany pulling out? Can one imagine this possibility and the aftermath within the eurozone? In any union, and currency unions seem to be no exception, is it not the rich or the leaders or the able bodied who decide that enough is enough, and they feel strong enough to go it alone, and they very often do?

Also as things presently stand, is there the possibility (I was going to call this a probability) of an increasing number of countries defaulting on their debt? Not only in Europe but worldwide? So where do we go from here?

Can this be the result of our over-indulgence? Our spending much more than we can afford? Our living off our credit cards? Our deficit financing when the economies are not growing more than the rate of interest we are paying? Is this now payback time? Is it possible that we might have wanted to rule the world ourselves and do it our way only and forgot that there might be a Supreme Being who did not form part of our plans?

In 2008 during the financial crisis, where Lehman Brothers was the first casualty I was given an opinion by one of my favourite advisors who maintained that it was the banks and their overindulgence who would play a large part in the cause of the problem, and because of their lack of transparency – as no one really wanted to bare out the real facts. My friend believed that this crisis was special, very difficult to put down, and to last a long time. “It will take 10 years of going down and 10 years of going back up. Thus, 20 years before we could recapture the 2007 levels.” I did not believe then. I am not quite sure now.

However bad the consequences may be, one has to keep his eyes wide open. This is the time to identify opportunities, companies which have been hit by the mud hitting the fan, but which are perfectly sound and well managed. It is opportunities such as these which will certainly pop their heads outside the bag. Be prepared to shoot straight and fast.

This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.

www.curmiandpartners.com

Mr Curmi is a director at Curmi & Partners Ltd.