This week the worry in Europe has focused in more closely on Italy, with most of the public having settled on the fact that Greece is a lost cause. The only question at this point is when Greek politicians and the European Central Bank admit what everyone already knows – that Greece is broke and won’t make good on its debts.
In Italy investors have seen interest rates rising very quickly, with liquidity in the nation’s bond markets drying up. In other words, nobody wants to own Italian debt, and it’s hard to blame them. The likelihood of Italy following Greece seems dangerously high, and forces us to wonder what will be the next domino in line to fall.
Causing even more of a stir than the rising chances of default in both Greece and Italy are the protests that have been springing up – some even turning violent – over the austerity measures being passed in those countries. Greek citizens have been particularly upset, which only reinforces the perception that Greeks live with far too many entitlements.
Jin Liquin, chairman of China’s sovereign wealth fund, agreed in a recent interview. In no uncertain terms he pointed to European laziness, resulting from such overblown entitlements, as the cause for the troubles there.
"If you look at the troubles which have happened in European countries, this is purely because of the troubles of a worn-out welfare society. I think [the EU's] welfare laws are outdated. The labour laws induce sloth, indolence. The incentive system is totally out of sink."
No matter the factors that caused Europe’s troubles, the task at hand is attempting to understand how far the tentacles reach, and how to protect ourselves. One firm that obviously failed to do so was MF Global, which became insolvent when Greece forced bondholders to take a 50% write-down on the value of their debt.
Now we are tasked with trying to anticipate all similar developments that could result from a repeat of events, this time with Italy standing in for Greece. What other banks or firms might be overexposed or get caught in the crossfire?
The more important lesson to learn from all this is that people have incredibly short memories, even a lot of money managers.
Case in point: Everyone seems surprised at the prospects of a Greek default. How many remember that between the 1820 and 1930s Greece defaulted on its debt roughly every 20 years? Today that number is slightly higher – around 30 years – but the point remains that this isn’t a rare event.
This begs the question of why on earth are investors willing to continue lending money to Greece by purchasing the country’s bonds. The answer, quite simply, is that most people who have been making the decision to buy Greek debt are using other people’s money to do it.
On the home front, despite all the new headlines stocks have been fluctuating within a range, roughly 10,000 to 12,000 points on the Dow Jones Industrial. Given the limited upside potential of this market, it hardly seems worth dealing with the volatility. However, we remain bullish on stocks in the long run (think years, not weeks) and know that at some point soon we’ll be seeing what should turn out to be a very good buying opportunity – and we plan to take advantage.
[Editor’s Note: Financial Sense’s own Dock David Treece has advanced to Round 2 of MarketWatch.com’s contest to find the next great investing columnist. We encourage all readers to visit his article, which can be found here, and vote to support his work.]
