Down and Almost Out in Athens

12/10/2009 9:37 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Beware Greeks bearing IOUs, goes the new proverb, after credit agencies ganged up this week on spendthrift Greece. Investors, already besieged by Dubai’s debt worries, purged portfolios of metals, oil, and emerging-markets risk.

Greece is the European Union’s black sheep after running a budget deficit that, at 12.7% of GDP, makes the most recent US shortfall of 10% of GDP look almost benign by comparison. It’s not in charge of its own monetary policy, and has to peddle its increasingly unsustainable debt to much more fickle buyers than those snapping up Uncle Sam’s offerings.

So, it could hardly have come as a surprise when Standard & Poor’s placed Athens’ credit rating on probation, noting “ongoing deterioration in Greece's economic environment and weak medium-term growth prospects.” Fitch Ratings upped the ante the next day with an outright downgrade, attacking “the weak credibility of fiscal institutions and the policy framework in Greece.”

The country is ruled by squabbling Socialists, never known for spending restraint. Their promises to trim the public deficit to 9% of GDP ring hollow considering that a year ago the target was 3.7%. Greece’s economy was expected to shrink slightly next year before the current crisis, which is likely to impose spending cuts and much higher borrowing costs on borrowers lucky enough to secure credit. The stock market has tumbled 16% in five days, bank shares crumbling fastest.

On the plus side for the Greeks, their troubles cut short the celebration in archrival Turkey following last week’s upgrade by Fitch. The credit agency had raised Turkey’s rating to a notch below Greece’s lowered one, citing “relative resilience to the severe stress test of the global financial crisis and some easing in prior acute constraints related to inflation, external finances and political risk.”

Overall, though, the trend is toward greater skepticism as budget deficits refuse to go away. Standard & Poor’s has just rained on Spain. The UK is taxing bankers’ bonuses, albeit more to score populist points than to fix its shaky public finances. Moody’s recently put the US and the UK on notice that their AAA sovereign credit ratings are not as solid as those of Canada, France, and Germany.

Meanwhile, doubts about the strength on next year’s recovery are piling up in the UK, Japan, and Germany.

At least the BIC continues to shine, with Brazil growing almost as fast as India and China.

Coincidentally, one of this week’s excerpts pairs Paul Goodwin’s picks of a big Brazilian bank and a small Chinese builder of distributed power plants, each poised to capitalize on rapid growth in its home market. The same can’t quite be said for the UK, home base for the construction and engineering company recommended by Douglas Moffitt. But Balfour Beatty is diversifying and generating healthy profits at the same time.

In his generally upbeat comments on the Canadian market’s prospects, Gordon Pape rightfully warns investors to prepare for more volatility and lower returns. But Canada’s credit is solid and its energy and mineral riches remain undervalued. Canada has what India and China need. In today’s world, that’s what counts.

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