Greek Austerity Nothing More Than A Reality Check

<%= article.AuthorDisplayName %>

By

Bruce Jackson

Published in Investing on 30 April 2010

Markets soar on recovery prospects whilst Greece still burns. Something has to give.

Maybe I'm wrong. It wouldn't be the first time, and it most definitely won't be the last time.

After a good old fashioned wobble earlier in the week, when the FTSE slumped 150 points or 2.6%, the bull market came roaring back. Over in the US, the Dow had its biggest jump in 2 months, and the tech-laden Nasdaq its best rally since November last year.

All was suddenly good again, except for shareholders in BP (LSE: BP) and the environment in the Gulf Of Mexico. That's a story for another day…

It's all down to the recovery. Apparently.

Spectacular Earnings

"Earnings season has been spectacular," said Eric Green at Penn Capital Management in Philadelphia on Bloomberg. "The recovery has been stronger than most have expected."

A host of US companies have been beating earnings expectations, the latest including razor sharp mobile phone company Motorola, king of the breakfast cereals Kellogg and Chinese search engine supremo Baidu. There has even been a high profile takeover, with Hewlett Packard splashing $1.2 billion to acquire struggling smartphone company Palm.

Closer to home, better profit numbers than expected from BSkyB (LSE: BSY), Unilever (LSE: ULVR) and AstraZeneca (LSE: AZN) showed the UK too has its share of market beaters.

Closing 30th April - Places Limited. Limited open period - closes 5pm, April 30th. For the first time in 3 months, Motley Fool Champion Shares PRO is enrolling a small group of new members to our revolutionary stock-picking service. CLICK HERE to claim your invitation to join us

Viva the recovery. As if to emphasise the point, European confidence in the economic outlook improved to the highest in more than two years.

Yet despite the euphoria, there does appear to be one potential stick in the ointment.

An Uncertain Recovery

The increase in European economic sentiment "contrasts sharply with growing concern that the Greek crisis may be spreading," said Martin van Vliet of ING on Bloomberg. Second- quarter economic "growth may turn out to be quite flattering, but with the Greek debt crisis showing signs of spreading, recovery prospects thereafter look increasingly uncertain."

Maybe it's a case of enjoying the recovery, whilst it lasts.

A Greek Reality Check

Or maybe the whole Greek crisis will blow over, especially as Greece has just agreed the outline of a €24 billion austerity package in return for the mother of all eurozone and IMF bailouts?

Certainly the situation is looking slightly more promising than it was a few days ago, but as we've learnt plenty of times over the past 2 years, these things can change very quickly, and usually when you least expect them.

A quick looking through some of the Greek austerity measures, and you'll quickly get an insight into why the country is in such an economic pickle.

"Highlights" include…

  • Public sector workers will lose their "13th and 14th month" salaries, paid at Christmas and Easter.

  • The average retirement age will be raised from 53 at present to 67.

  • Greece's swollen public sector, which employs about 13 per cent of the workforce, will be gradually reduced through a recruitment freeze, the abolition of short-term contracts and closures of more than 800 out-dated state entities.

Rather than calling them 'austerity measures', a better term would be 'reality measures'. Still, it's not the fault of the Greek people that many of them have had it so good for so long. Yet they will pay what they think is a heavy price. We shouldn't ridicule them.

Doctor Gloom

So will all these measures, and that big bailout, finally put any thoughts of a European sovereign debt crisis firmly behind us? The markets wanted to believe that yesterday.

Nouriel Roubini, the New York University professor who forecast the US recession more than a year before it began, thinks differently. If you think I'm permanently pessimistic, I've got nothing on the man they call Doctor Gloom. He says sovereign debt from the US to Japan and Greece will lead to higher inflation or government default.

Greece -- The Canary In The Coal Mine

As usual, there are more questions than answers. I can't help but think this market feels a bit like it did between March 2008 (the Bear Stearns canary in the coal mine) and October 2008. During that period, markets rose, before all hell broke loose in October 2008 as the coal mine finally exploded. Today Greece just could be the canary in the coal mine.

All investors like you and I can do is to remain vigilant, and cautious. The sale of two of my weaker holdings a couple of days ago is currently looking premature. I could be overly conservative, or just plain wrong. But I have no regrets. Weaker companies have no place in any portfolio, singing canaries or not.

More on the markets:

> If you are looking for share ideas, Champion Shares PRO could be right up your alley. It has a stable of cheap well-run businesses, and is adding more all the time. It is open to new members for a strictly limited period of time. Click here for a no-obligation 30-day free trial. 

> Of the companies mentioned in this article, Bruce Jackson has an interest in AstraZeneca.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

sippquixote 30 Apr 2010 , 4:33pm

Public sector workers in Greece are 13% of the work force and Bruce Jackson thinks that is too much.
What about the percentage of public sector workers in UK, does Bruce Jackson think that number is also too much?
If so, what is the right number of public sector workers in UK?

curedum 30 Apr 2010 , 5:17pm

Perhaps the eurozone should split into a northern european "Euro" and a southern european "Peso"?

pennysworth 30 Apr 2010 , 7:00pm

I always thought the European Union was a great political idea, but that the euro was a bad economic one. How was it ever going to be possible for "rich" countries like Germany and France, and "poor" countries like Greece and Portugal to co-exist within the same "hard" currency for long? Curedum's idea of a "euro" and a "peso" makes a lot of sense, or maybe it's time to ressurect the drachma, the escudo, the peseta, the lira....old Uncle Tom Cobley and all!

theRealGrinch 30 Apr 2010 , 8:27pm

Greece's biggest problem is its own people's unwillingness to reform. I have zero sympathy for greece, the EU and the euro. In fact, I am happy for the demise of all three. When will politicans learn that single currencies do not work just as dirty floating doesnt work? I rallied against the Emu in the 80s and 90s and will do the same against the Euro. Monetary policey is crucial to iron out regional variations and you simply lose that instruments with a single currency.

As was once said, he who controls the currency, controls the government.

gordonbanks42 30 Apr 2010 , 11:06pm

The so-called "convergence criteria" which were used to decide who could join the Euro, and when, were never going to be enough to keep the thing together.

All very well having various economies in roughly the same condition at a certain point in time, but what about the dynamics of the thing thereafter? In order for it to hold together there has to be a reasonable expectation that those economies will respond in more or less the same way as each other under a wide variety of circumstances. That was never going to be the case, and now we're seeing a very vivid counter-example.

There are regional variations in economic performance within countries, but we don't expect to be treated to the spectacle of South-East England agonising over whether to bail out County Durham (or wherever - nothing against County Durham). We just get on with it, and would expect the favour to be returned in due course if needed. What is missing with the Euro, IMO, is not convergence, but a genuine sense of shared interests and reciprocity.

Floorlord 30 Apr 2010 , 11:38pm

Greece's problem is not the size of its public sector. That is relatively small in comparison to the rest of the EU including the UK. Greece's problem is its economic culture. Like simply not acknowledging a personal or collective responsibility for the maintenance of infrastructure, be that economic or physical. Like the government having to trade off mindblowing concessions to its citizens just to get them to acknowledge any level of collective responsibility. Taxation is to be avoided. Only government employees are on strike or protest just now, because they are, for the most part, the only ones paying taxes.

As theRealGrinch says, it's a massive cultural reform challenge. But that is going to happen. The European experiment is too big a project to be allowed to fail. The Euro is already a reserve currency higher in importance than the UK pound was not too many years ago. Greece is a minnow and the pike of Germany, France and Italy (watch for Poland's future influence as the PIGS's declines) will not allow failure to happen. Real politik.

mynix 01 May 2010 , 8:39pm

Isn't it amazing how quickly we all forget? The economic crisis wasn't caused by banks actually collapsing. It was caused by a single bank being allowed to collapse, alerting everyone to the 'elephant in the room'. The predicament Greece finds itself in is no different. Bad economic management and a lack of regulation in individual economies is going to bite the entire Eurozone in the backside irrespective of a bailout or not.

It is impossible to conceive that any such failure will have nothing but a negative impact on the world economy. Irrespective of how comparatively small the Greek economy is, Europe as a trading entity is huge - second only to the US. A crisis within the Eurozone will inevitably have an impact on global economies and markets.

If the failure of Lehman forced banks to admit to the level of 'toxic' assets they were holding, then the failure of the Greek economy is going to force everyone to look intensely at the balance sheets of every other nation state - particularly those in Europe - for the most part, they don't make for happy reading.

Irrespective of the domestic politics in the larger Eurozone economies, they are not going to allow the Greek economy to fail, nor allow it to effectively de-list from the Eurozone. A run on one will cause a run on many. The ECB knows that if the crisis is allowed to extend to other Eurozone countries then Europe's ability to contain it is questionable.

That however doesn't really matter. In the case of the banks, the assets were only toxic on paper. With governments, the debt is real and tangible, and has to be re-paid. There is no ducking it, or insuring against it this time. Sooner or later, everyone has to pay the piper.

And to all of those individuals in the U.K that are happy to sit there and gloat about these problems and thank their lucky starts that they aren't part of the Eurozone - wake up and smell the coffee. Irrespective of membership or not, if the Euro goes down the pan, then we go with them. At best, we are unable to exploit our biggest trading partner to help us out of recession, and at worst, too much scrutiny is drawn to our own deficit, and we find ourselves requiring the same kind of bail-out - only without the help of the ECB.

In hindsight, we can now see that debt fuelled growth was a bum deal. We have avoided the real pain coming our way this far by shifting the debt-burden from private to public sectors. Who bails out the public sectors when they face the prospect of going bump? If you can answer that honestly, you can work out which way the markets are going and take action accordingly.

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.

More articles in this section

Beta

Tags for this article

This article hasn't been tagged yet. Be the first to add a tag below.

Login or register to add tags.

Beta

Related content