Market Buzz

Market Buzz – Greece Defaults on Debt but Labeling the Action a “Restructuring” Makes it Okay

Dominating the headlines near the end of the week was the announcement by The European Commission and European Central Bank (ECB) that they had struck a deal to get Greece back on track and avoid the ever dreaded ‘debt default’ (at least for now). The markets appeared to welcome the news with global indices rallying strongly on Thursday and maintaining those gains as we closed off the week. As part of the deal, private banks have been forced to agree to incur a 50% write-down on Greek debt, wiping approximately €100 billion off the country’s tab.

To us there was really very little doubt that a bandage solution would be applied to the Greece debt. But rather than become excited that officials have successfully ‘kicked the can down the road’ a little further, we are more focused on the actual long-term (multi decade) implementation of the austerity measures that will put Greece in a position whereby they will actually start paying down their debt as opposed to continue to run a deficit which just pushes their debt higher. It is however somewhat annoying to those who know better that the plan, as it has been laid out, can be referred to by anyone as a “restructuring.”

In debt analysis there is a term referred to as a recovery rate, which is the percentage of debt that can be recovered by the lender in the event that the debtor defaults. Referring to a March 2009 report issued by Moody’s (“Sovereign Default and Recovery Rates, 1983-2008”), the long-term historical average recovery rate for sovereign debt in default is indeed 50%. So considering that Greece’s creditors are now stuck with only 50% recovery of their loans to the tiny PIG nation, how could anyone legitimately call the latest deal anything more than what it really is – a Greek default?

In our view, these bailout packages succeed in achieving little more than transferring responsibility from the irresponsible to the responsible (or at least slightly more responsible). For years Greece has lived and spent beyond its means, with the government supporting massive social programs (including retirement at age 50), permitting rampant tax evasion where only 5,000 people in a population of 11.3 million declare income over US$100,000 per year and borrowing aggressively to finance the deficit. The big fear is that a ‘disorderly default’ from Greece will cause a contagion throughout the financial system, but perhaps the greater long-term fear should be the contagion of unaccountability.

Ultimately we cannot just keep ‘kicking the can’ further and further down the road. Eventually someone will have to pay the bill and unfortunately it seems that it will not be the one who runs up the tab. Even now Greece’s projected budget deficit for 2011 is forecasted at 8.5% of GDP compared to the target set in the last bailout agreement of 7.6%. At US$485 billion, Greece’s debt is still just a speck compared to the combined debt of all the other overindulging, under-producing nations that will be standing in line for their handout (cough cough) – I mean bailout.

Looniversity – Of Tombstones and Graveyard Markets

With ghosts and ghoulish figures roaming the streets in celebration of all Hallows Eve, we thought it would be appropriate to define a couple of the creepier investment themes; tombstones and graveyards.

First, we start with tombstones; which ironically, in the financial world are created at the beginning of a stock’s life. Essentially, a tombstone is an advertisement written in heavy black ink surrounded by a black border issued by investment bankers before the public offering of a security. The tombstone gives “bare bones” details about the issue and lists, in order of importance, the underwriting groups involved in the deal.

On the other hand, a graveyard market seems far more aptly named. Essentially, it is used to describe the end of a prolonged bear market; when investors have just finished weathering a financial storm. Activity tends to slow considerably as the dead (long-time investors) can’t get out, and the living (new investors) aren’t in any hurry to get in (sound familiar?).

Put It To Us?

Q. As a contrarian, all this talk about “socially responsible investing” in recent years has got me thinking that, while it may be good for my conscience to invest this way, in terms of returns, it might be better to look at “sin stocks.” What do you think?

– Shirley Sterling; Montreal, Quebec

A. Well, we hate to say it, but you may be right. Industries that lure us with “naughty” temptations can offer a good place to park a portion of your portfolio. First of all, these companies provide relatively stable returns to investors, both in good times and bad. As the old saying goes, “What do you do to celebrate good times? Drink, smoke, gamble, and have sex.” And, what do you do during stressful and recessionary times? “Drink, smoke, gamble, and have sex.” The returns provided by the companies related to these activities are often less prone to the cyclical downturns of the economy.

So-called “sin stocks” are generally those companies which are involved in the gambling, alcohol, tobacco, sex, and defense industries. Outside of the numbers, your choice to invest in these stocks will come down to personal beliefs and preferences.

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