Slipping up on Greece

6 May 2010 8:00 am | By Gregor Watt

Last week’s downgrading of the credit ratings of Greece, Portugal and Spain sent tremors through the financial markets, with the discounting of Greek sovereign debt to junk status the most significant move.

Although the downgrade in Greece will have little direct impact on the average UK investor, concerns about the outlook for sovereign debt could be far-reaching.

Co-operative Asset Management head of equities Mike Fox says the slow response to the crisis so far means the situation could spiral and has called for a swift and co-ordinated intervention.

Fox says: “The parallels between this and the sub-prime crisis, when the response came too slow to avert a severe recession, are striking. Greece represents a broader issue of the Government over-indebtedness prevalent in finances of other countries, particularly Ireland, Portugal and Spain, and that is why investors are so concerned.

“The EU’s disparate political framework is proving problematic in getting the necessary support that would calm the markets. Political will must start heading in the same direction as monetary need.”

Saltus Partners investment manager Dan Kemp also feels the problem is in danger of spreading and regards the underlying problems for the world economy as far more significant than the failure of the Greek economy.

Like the canary warning of an impending explosion, the Greek crisis signals problems for investors

He says: “While it is incontrovertible that Greece makes little contribution to the global economy, we believe that dismissing its problems as unimportant is akin to a miner reminding his colleagues that the death of a single canary is unimportant.

“The crisis in Greece is in itself unimportant but the signal it provides to investors is exactly the opposite. Like the canary warning of an impending explosion, the Greek crisis signals three problems for investors.”

The first problem, according to Kemp, is a return of the bond vigilantes determined to push up the price of borrowing for Governments unable or unwilling to bring their spending under control.

Second is a possible increase in protectionism as countries try to placate their electorates rather than help their neighbours, which would, in turn, undo the gains from globalisation.

A third possible problem is a fall in the risk premium available to investors as increasing gilt yields erode the difference between Government stocks and riskier assets.

Kemp says the canary in the mineshaft is not dead yet, merely unwell, and says that the International Monetary Fund and European Union can yet step in to resist the advance of the bond vigilantes. However, he says in the meantime Saltus has moved its investments into other areas.

In the face of jittery stockmarkets, one area that seems to be attracting investors in the search for a safe haven is gold. Last week, ETF Securities reported a surge in demand for investments linked to the asset as investors shy away from Government debt, and this is despite a strengthening US dollar.

ETF Securities says it expects the price of gold to be high as long as there are investor concerns: “Gold remains near historically high levels in euro and sterling as sovereign risk concerns weigh on both currencies.

“While short-term gold price movements will likely continue to be affected by moves in the dollar, longer-term structural concerns about the potential implications of rising government debt burdens for fiat currencies and inflation will likely keep strategic gold demand high.”

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