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Loss adjustment

Riots in the streets of Athens, a nation-wide strike by civil servants in this country – there is a lot for investors to take on board at present. It seems the message that we have been living beyond our means for far too long is well and truly hitting home.

And yet, remarkably, the immediate reaction of markets has been to recover some of the ground lost in the first half of the year.

The obvious reason for the better tone has been the removal of some uncertainty, given the Greek parliament has now passed the austerity package. But we are not out of the woods yet. It is by no means certain Greece will ever be able to repay the enormous debt it has built up and the recession ushered in by the measures it has been forced to adopt will not make the task any easier.

But we do now have some time in which to cobble together whatever is needed to ensure the stability of the euro and to punish those who helped Greece get into this mess. Not that they can be punished too severely. Many European banks, notably in France and Germany, own rather too much Greek paper. Were it to collapse in value, then meeting the more rigid capital adequacy require-ments might prove an issue.

France seems to be tackling this issue head on. Delaying repayment of the bank loans does not necessarily guarantee they will be repaid in full but it avoids the need to make too drastic a provision at this early stage.

And with Ireland and Portugal in the same lifeboat for the foreseeable future, maintaining confidence is what it is all about. Greece deserved some form of come-uppance. The problem is delivering it without encouraging contagion.

Elsewhere, there is a healthy divide between the bulls and the bears. Some respected managers point to equities being cheap. Perhaps they are talking their book a little but it has to be said the alternatives do not look too appealing. Government bond yields continued to fall during the late spring and early summer and cash continues to return way under inflation. On income grounds, equities have their attractions.

Even so, bears are not without a voice and there are plenty of commentators in the US preaching doom and gloom. A manager of my acquaintance who follows technical analysis closely feels the charts are encouraging him to believe markets remain in a downtrend but the weight of bearish opinion suggests any surprise will be on the upside. Crystal balls are as obscure as ever they were.

What hard news is there available at present? China is slowing and has inflationary issues to address. But such is the lack of transparency in what is still very much a command economy, that it will be difficult to draw firm conclusions.

The US seems to be lifting itself out of the pit into which it dug itself but the strength of the recovery remains questionable.

However, two indicators from America do seem to give more encouraging signals. The housing market there is showing signs of returning to life, which is crucial to a return of consumer confidence. The adverse balance on wage rates with the emerging world has also moderated significantly and it could even be that some industries will start migrating back.

The ability of the capitalist system to rebalance itself never fails to amaze.


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