Europe Has to Hold the Line

05/24/2012 10:30 am EST


John Stephenson

President and CEO, Stephenson & Company

That is the tough situation facing Germany and the ECB, says First Asset’s John Stephenson, and he thinks investors need to be prepared for its impact on the markets.

What does the Greek tragedy mean for Europe and beyond? We’re here with John Stephenson, who’s going to tell us.

Well, it means tough times ahead for investors. That’s what it really means when it boils right down to it. I mean, after all, I think this is where Europe has to hold the line, with Greece.

I mean, if you had an uncle and he kept coming to you borrowing money, couldn’t get a job, always wanted more money, always had an excuse, eventually you would have to say, "Listen, Uncle Charlie (or whoever), it’s time to cut you off. We just can’t keep doing this."

This is what the Germans face right now. They’re terrified that they’re going to enter into a sphere where they were in 1934—the Weimar Republic, 6,000,000% inflation, wheelbarrows full of marks to go buy bread in the morning. This is the thing that scares them most, that what they’re looking for is essentially more money and of course, the ECB would be the mechanism to do it by printing more money but that’s a nonstarter for the Germans.

So, I think ultimately, Greece leaves the union. That’s bad in the in the short run for investors. It’ll see the US ten-year note hit 1.5% or below. So, probably good time to still be in the Treasury market for a little bit longer, but those days are getting long in the tooth.

So, you have that flight to safety, they come back to the dollar, but is there anything…do you see any concerns with the recent elections? And in Greece, you have the issue of anti-austerity, but also in France, which is one of the major..

Yeah. I mean, I think really there are a couple of issues. The thing that the market is focused on right now is the likely withdrawal of Greece from the European monetary union. That’s probably the most likely thing that will happen.

Of course, you mentioned France. For the first time in 17 years, they elected a Socialist government head. You have to go back to Mitterand to find a time where it was that way. I think he’ll actually be more moderate, and it’s probably a good idea that he’s introducing dialogue, which is he’s doing in the next couple of days, with Angela Merkel about growth, as well as austerity.

But the bigger concern beyond those two countries now is Spain. The bond yields now are over 6%; they’re almost 6.3%, and that’s really worrisome. Anything over 6% is unstable.

And they had a very similar problem to what we experienced here in the US, which is basically a housing boom that’s lasted ten years. But in the case of Spain, not only the banks are not properly capitalized—which is the current problem—but house prices are still falling. So the problem is getting worse, not better.

John, I’ve heard that in Spain, nonperforming loans are at about 20% for some of the regional banks, where here in the US, they take over banks when nonperforming loans get above 5%, so…

That’s right. What happened is—although it was contentious at the time, when US Congress passed the TARP, and it was $750 billion that was put into the market, and most of it went into financial institutions—they were told, OK, you’re getting the money but every last one of you has to recapitalize. You have to bring up your Tier One equity capital, so that you can withstand another storm should it happen. So, that’s the good news. We’re bulletproof.

That never happened in Europe in general, so not only it is a government debt crisis in Europe, but it’s also a financial institution crisis in Europe. And that’s across the board, whether you’re talking Germany, you’re talking France, whether you’re talking the UK for that matter—really anywhere in Europe is problematic.

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