SVM Asset Management's Colin McLean believes the cost of trying to maintain the Eurozone might prove too much for the voters of Northern Europe.
McLean suggest that what is needed is not an exit by Greece from the Euro, but a split in the Euro roughly across a North/South divide. "This would see Germany cease to have an undervalued currency, and the Mediterranean countries would get a boost from devaluation. This would address the underlying problem, and stockmarkets might respond surprisingly well to this. What investors need is clarity, not another European fudge," Says McLean.
McLean believes Greece’s problems go well beyond debt. "The budget deficit will not be corrected until the economy is comprehensively reformed. Greece is one of Europe’s most regulated and least entrepreneurial economies. It has a generous welfare system, a rigid labour market and a low tax base. The underlying reason for the debt must be addressed. Without that there will be few takers for any of the assets that Greece needs to sell to balance its books," explains McLean.
McLean points out that until recently Greece seemed unimportant to the European economy – just 2% of the EU total. And even though Britain might not be contributing directly to the latest EU rescue for Greece, he believes there are big hidden costs as Britain has the third largest exposure to Greek debt. "Our banks own Greek bonds worth about £3bn, but the risk to the British economy far exceeds this. Not least is the likelihood of Spain and Italy facing financing problems if a solution is not found for Greece. Ireland could chose to default on its bank creditors, which might avoid a sovereign default," says McLean.
McLean also points to the Lehman Bank failure in 2008, when complex financial derivatives saw losses emerge in unexpected areas. He believes we need to now question whether the knock-on effect of Greek problems is factored into our own austerity plan.
"European banks are stronger than they were in 2008, but they are ill-prepared for more losses. Under a French plan for Greece, banks across Europe are being pressured to roll-over their Greek bonds, turning them into much longer term debt. Losses on this for banks might be spread over three years, but it still looks like a short term fix. And the rate of interest that Greece would pay would not be commercial, meaning that lenders are not being properly compensated for risk.Banks share prices reflect the fears. Banks remain exposed to problem loans, particularly to the UK mortgage market and commercial property. Investors need to assess carefully any investments in banks and insurers," concludes McLean.
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