Don’t Let These Two Basket Cases Stop You Making Money

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Italy and Greece are back in the news for the wrong reasons. Their wobbly finances are making headlines again.

Pity the fool who is swayed by this.

It isn’t news. There’s nothing different about any of this that we haven’t seen before.

I can say that with a lot of confidence because I just polished off Adam Tooze’s history of the last decade. It’s called Crashed: How a Decade of Financial Crisis Changed the World.

Tooze, a historian, goes over the build-up to 2008 before delving into the ugly, complicated and long tail of the aftermath.

Much of the book is preoccupied with Europe. The eurozone crisis flared for a long time. And there are still a few burning embers glowing right now.

One of those is Italy…

The Financial Times reported yesterday that Italian banks have been loading up on Italian government debt this year.

This is reviving the fear of the ‘doom loop’ between European banks and their sovereign governments.

Once bitten, twice shy. This goes back to the aftermath of the 2008 crisis.

European banks were burnt badly in the real estate busts around the world.

That caused them to pull pack from lending to the private sector. They sought safety in government bonds instead.

Except the safety was a false mirage. When the solvency of governments like Italy, Spain and Greece came into question, their bonds began to look a lot less like a safe asset and more like worthless paper.

It slammed the European banks again.

This was the ‘doom loop’. A problem in their governments’ fiscal position could impair the assets of the banks. That drove the economy further to the edge of the cliff.

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That’s history now. But the Financial Times piece shows how markets remember, and also why you shouldn’t worry about it.

The next crisis will not be a repeat of what happened last time. That risk is well understood and provisioned for now.

It’s also why the latest twist in the Greek saga preoccupies few people.

Greece: Yesterday’s problem

The Wall Street Journal reports that Greece’s European creditors are threatening to withhold further funding until the Greek government institutes further ‘reforms’.

The main bone of contention appears to be that it is still very difficult for banks to foreclose on Greek property when the loan is in default.

The Greek government is reluctant to make this easier, considering the political cost with its electorate. Regardless, the government is likely to bend the knee eventually.

Non-performing loans are still a huge issue for Greece a decade on. But it’s a minor sideshow now in the global theatre. The market knows perfectly well the poor state of Greek credit.

There was a time when news out of Greece could send the markets gyrating. This was far out of proportion with Greece’s level of trade. Its economy was 1% of European GDP at the time of crisis.  

No. Greece mattered because German and French banks owned a lot of Greek debt. If Greek defaulted, those banks were toast.

That was the first impetus to ‘save’ Greece.

The second was to put a firewall in place so that a possible Greek default didn’t imperil any of the other weak countries like Ireland and Portugal.

The political aim was simply for the wider eurozone to hold together against further contagion.

Those days are long gone now. Greece can go back to the economic backwater it was and remains without shaking the market.

Old fears surface from time to time, but don’t let them stop you from taking a position in the market.

Indeed, the world is moving on.

China eyes off Greek assets

The Chinese are now buying up Greek properties — still 40% off in a lot of places.

In addition to a nice Athens pad, if they spend 250,000 euros they can get an EU permit for five years alongside the keys.

This will revive the property market and probably drive further Chinese tourism. There is big money here.

Chinese tourists spent $250 billion globally in 2017, according to The Economist. That figure is only going to get bigger. Beijing doesn’t mind using this buying power for political ends, either.

Certainly there could be scope for further Chinese diplomacy towards Greece. Greece’s strategic location in the Mediterranean ties in with China’s One Belt, One Road initiative.

A Chinese company already operates the main Greek port.

And the Chinese have shown high interest before. They were prepared to lend money to Greece at the height of its distress — only to be told by Berlin to back off.

But you can see a further implication as the world turns. Arguably, a crisis in China, rather than Europe, is more likely to sink Greece these days — because it could cut off the flow of funds currently reviving the economy there.

Don’t let mainstream fears take your eye off the ball. The game is to find and back good stocks — and not let troubles in Greece and Italy distract you from finding them.

Cheers,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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