No Saving Greece, No Stopping China

05/17/2010 12:13 pm EST


Ryan Irvine


While Europe has merely papered over its debt problems, some of the markets’ other worries are misplaced, writes Ryan Irvine in KeyStone’s Small-Cap Stock Report.

Europe’s debt problems will continue to weigh on stocks. Ger­many’s parliament approved Berlin’s share of the rescue package after a boisterous debate. However, investors still fear that Greece may not make a May 19th deadline [for] a debt repayment.

The concerns go far beyond Greece, however, the smallest economy in the European Union. A further loss of confidence in European government debt could have an impact on other weaker countries like Portugal, potentially requiring another difficult bailout process. The debt crisis has already badly undermined Europe’s shared currency, the euro.

At present, Greece is the kid with the cold and the world is not so worried about the country unto itself. It’s when the sniffles turn to a cold and the cold spreads into the rest of the PIGS (Portugal, Ireland, Greece, and Spain) nations where you could really see a problem.

While we are no experts in this area, for Greece itself, when you look at the country’s “balance sheet,” they are broke. There is no sense in sugarcoating it. Giving money to Greece will not solve its problems; it will only postpone them, as liquidity injections in other parts of the world have done. You can throw paper at it for a while, but the problems will come back. The world cannot continue to bail everyone out. Bailing Greece out is just moving money from one balance sheet to another, and that is simply not a solution and [the] market realizes this.

The country’s citizens and government have lived beyond their means for decades, and they are now paying for it and will have to face a period where they live below what they are accustomed to. Bad businesses, irresponsible individuals, and countries should be allowed to fail or should at least face the consequences of their actions. They should not be permitted to reach out “hat in hand” to the “responsible nations” for bailouts when the game of musi­cal chairs finally ends. Nobody bails you or [me] out if we go out and spend like a drunken sailor.

At present, the risk aversion trade is on and investors who fear a slowdown in China have been punishing base metals and related stocks and pushing some China-related stocks lower. For us, a slowdown in China’s GDP growth (estimated to be at 10-11% in 2010) would be a good thing long term, given its dramatic surge in recent quarters and the fears of inflationary pressures. In the near term, as fear continues to permeate the markets, we expect this trend to continue, but great long-term values will present themselves.

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