Over the course of several weeks this blog has been very downbeat on the prospects for European markets in general and Greece in particular. It continues to get worse with credit rating downgrades for both Spain and Portugal. The “contagion” genie has escaped the bottle and rages while the European governments treat this as a political matter, which means any actions are likely to be late and inadequate.
The bigger problem here, aside from how these governments will fund their operations, is that the specter of debt defaults, in whatever form, is out there. These debts – primarily sovereign in the cases of Greece and Portugal, largely private sector in Spain – are held by banks in the fiscally “more prudent” parts of Europe. One of the less well known aspects of the financial crisis is that, as badly exposed as US banks had been, large European banks were arguably worse, and have done less to re-position themselves.
A full on European banking crisis is not out of the question. When we consider what the failures of Bear Sterns and Lehman Brothers did to the global financial system, it’s not difficult to see what that could imply. At the very least, investors should be out of Eurozone assets, and possibly short for the more intrepid. Anyone holding a global or international stock or bond fund should make it their business to check out what it is holding, and make the appropriate decisions on whether to hold or sell. More to come in the days ahead. This will be interesting to say the least.