Why you should worry about Greece

Why you should worry about Greece
GREG HOFFMAN
May 3, 2010

A glance at a chart of the All Ordinaries index since its March 2009 low gives a fair indication that worrying is not currently on the agenda for most investors. ''Stocks are going up,'' they might observe of the 50 per cent rise, ''now's the time to buy.''

''Stocks have already gone up,'' we might reply at The Intelligent Investor. And as our former editor James Carlisle likes to remind people, stocks have no mass and therefore cannot have ''momentum'' in the scientific sense.

Small, regular gains can be easily stripped away by downward ''gaps'' in price; such as that experienced last week by investors in popular biotech stock Biota, which saw its stock fall sharply after investors were disappointed with the latest royalty payments relating to its anti-flu drug, Relenza.

It's important that we don't become complacent following a year of strong gains. And our team has many things on its worry list. One of those is a potential sovereign debt explosion. We saw wobbles in Dubai late last year and Greece is currently making plenty of headlines.

''The Greek debt crisis is now morphing into something much broader,'' wrote Mohamed El-Erian in the Financial Times recently.

El-Erian is chief executive and co-chief investment officer of Pimco, the world's largest bond investor. That alone would make his thoughts on the topic noteworthy. The fact that he is also a former deputy director of the International Monetary Fund (and was put forward as a potential managing director of the IMF in 2004) provides even more weight to his insights.

''Markets are now catching up to the reality of over-burdened public finances in the aftermath of the global financial crisis,'' El-Erian explained.

''These developments are of particular concern to countries with elevated debt levels and challenging maturity profiles for this debt. Indeed, absent some dramatic change in sentiment, they will need to worry not only about their ability to mobilise new funding from the private sector at reasonable cost, but also about keeping their existing creditors on board.''

He then stated his view of the likely next steps in this messy situation: ''As a result, credit downgrades will multiply. And once a package is approved for Greece, there will be questions as to whether similar packages can be secured for other vulnerable countries in the European Union.''

Eye-catching insight

Those comments are usefully succinct but not particularly out of the mainstream. What caught my eye in the same piece was the following insight:

''...the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.''

With substantial action from the European Union and the IMF, these ructions may prove a sideshow for Australian investors (as did last year's concerns about Dubai). But if El-Erian's fears prove well founded, we may be at the start of something much more serious.

The key point is that there are substantial risks in the global economy and it is foolish to ignore them. And, on a related note, over the past two years we've seen just how vulnerable our Aussie dollar can be to a loss of confidence.

Perhaps we're now firmly locked in to a Chinese ''growth miracle'' and our currency has found a new, permanently high plateau. But if that's not the case, now might prove an advantageous time to add some well-chosen international exposure to your portfolio.

This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor

http://www.smh.com.au/business/why-you-should-worry-about-greece-20100503-u2s0.html