Europe: “It’s Not a Bullish Scenario” … But It’s Not Armageddon Either, Dow Says
After seemingly being obsessed with Europe for most of May, the stock market appears to have moved on to other issues, be it the BP oil spill,geopolitics or just general concern about the recovery.
But that doesn’t mean the debt crisis in Europe has been resolved, certainly not judging by market indicators, including:
- * Is Greece the New Lehman? The price of insurance against default, known as credit default swaps, has been rising in recent weeks on the debt of Europe’s so-called PIIGS.
- * Shades of 2008: Measures of lending rates banks charge each other, such as LIBOR, Euribor and the TED spread, have also been widening. Meanwhile, Bloomberg reports overnight deposits at the ECB hit a record on Wednesday, another sign of banks’ wariness of counterparty risk.
- * For Whom the Bell Tolls: On Thursday, the euro failed to hold a rally above $1.23 while the price of Spanish debt fell to its lowest level since November 2008. Yields on 10-year Spanish debt rose to 4.53%, higher than it was prior to the huge EU-IMF bailout package announced May 9, according to Miller Tabak.
So, less than a month after the EU and IMF pledged $1 trillion to stem Europe’s crisis, is the market saying the massive bailout is doomed to fail?
Not according to Mark Dow, portfolio manager at Pharo Management, a hedge fund with more than $3 billion in assets under management, who (correctly) notes the market is often wrong, especially in the short term.
Good Policy or $1 Trillion Boondoggle?
Unlike most, Dow was an early supporter of America’s TARP plan in 2008 and the stress tests of early 2009, which he says “turned out to be phenomenal.” Similarly, he believes the EU-IMF package put the EU “in the driver’s seat” and gives regulators “the tools to calm systemic risk.”
Meanwhile, the governments of Greece, Italy and Spain have already passed austerity packages aimed at lowering government spending as a percent of GDP. “It’s not popular but they’ve done it,” he says. “They’re lining up and they’re doing it. ”
The countries that approve austerity measures will “outperform the budget targets they set for themselves,” the former IMF staff economist predicts. “When you’ve been behaving poorly for a long time, there’s a lot of low-hanging fruit.”
Having said all that, Dow isn’t a Pollyanna.
“It’s not a bullish scenario by any means for Europe — the growth prospects are bad,” he says. “But if they can stave off systemic risk, that’s fine.”
And on that front, what regulators did with Euro-TARP was “good and necessary, but it wasn’t sufficient,” Dow says. “They still have a lot more work to do. ”
Remember, this is the optimistic view, which is important to keep in mind as the financial world turns its attention away from Europe – for now.