It should be common knowledge to everyone who is involved in the market, that the Greek debt crisis that is unfolding last few weeks, has greatly accelerated the pace of the impending Sovereign debt crisis.
When governments bailed out various banks during the credit crunch, they essentially took over their banks' bad balance sheets on to their own. They reduced interest rates to empower the banks. They secretly hoped (and still do) that when markets eventually realize that the government debts are unsustainable as well, they would have their newly fortified banks to lean on.
This may still happen, but I don't think the governments expected the sovereign debt crisis to come to the forefront so quickly.
As it appears, contrary to what the disunited faceless EU officials say, the recent bailout of Greece didn't do enough to calm the markets. The unfortunate truth is that in spite of the Greek austerity measures and the bailout of Greek debt, Greece would not be able to pay for all its financial needs.
As I see it, there is only one option for Greece-- a default. This could come in a number of shapes or forms. To enumerate:
1. Payment restructuring, e.g. negotiating to pay back 50 cents for each euro borrowed.
2. Leave the EMU (Euro Monetary Zone) and devalue the Greek currency
Both these options are currently unthinkable. I'd suspect that option #1 is the most likely, even though it is hard to predict how that would work.
This default will greatly rattle the world markets, and especially the European economy. This could be the next cause of the global economic contraction.
The important part to note in this doomsday scenario is the number of
unknowns. What makes it scary is that there are a lot of unknowns. In fact, there are no historical events that I know of when a profligate country (eg: Greece or Spain) was in a monetary union with some much more austere countries (eg: Germany).
As the unknowns become more known, the problem will appear more tractable. Uncertainty is what spreads fear in the market.
This fear also presents opportunities for the intelligent investor.
So what am I doing now? Absolutely nothing. Since I am horrible at predicting the future, any action I take now would likely be a speculative action. Stocks have come down, but not enough to be attractively valued. I could short the Euro or go long on the US dollar, but that would be a speculative action.
If it is a choice between speculation and seeing market value of my businesses marked down, I reluctantly but confidently, choose the latter. No one likes to see their net worth go down.
If the businesses are valued at much better rates in the near future, I hope to buy more of them at that point.
