SocGen’s resident uber-bear Dylan Grice is back and he’s got harsh words for anyone looking for distressed value in Europe:
Who knows, maybe the latest Greek bailout and the ECB’s decision to relax collateral
requirements will succeed in containing the eurozone’s crisis. I certainly hope so, but I doubt
it. Mr Market’s mood swings are now more important than pleas for respite on grounds of
better Portuguese and Spanish fiscal metrics. More important though, apart from a Greek
bond market that is now pricing in default, where are the distressed valuations? There may
well come a time to fill your boots with eurozone stocks and bonds, but it’s probably not now.
At last weekend’s Berkshire Hathaway meeting, a shareholder asked Warren Buffett what
he thought about the developing situation in Europe. He replied that he wasn’t sure how this
movie ends, “and I don’t like going to movies like that.” I think he’s spot on, as usual. Albert
and I have both been pretty clear in past work that the strain on government balance sheets
will ultimately place a fatal strain on the single currency, but who honestly knows what the
end game is here?
Not surprisingly, he cites the work of Ken Rogoff — the man of the moment for his work connecting financial crises and sovereign debt crisis — to show that we’re easily at crisis levels by historical standard.
And an ominous allusion to the Asian crisis:
We also saw it during the Asian crisis of 1997. The following chart shows how the key Asian
exchange rates broke as the crisis unfolded. What’s important to understand is how
confident the world was at the time that Korea was not Thailand or Indonesia (or
Malaysia, which also lost its peg, though it is not shown on the chart). Korea was deemed
more structurally sound.
And here is the ultimate lesson:
In many ways Korea was more structurally sound than the other economies. Unfortunately it
was similar in one way that counted, which was that a debt load which was sustainable at one
exchange rate was unsustainable at another (Korea, like most of its Asian neighbours, had
borrowed heavily in dollars during its lengthy fixed exchange rate period, so when Mr Market
repriced those exchange rates its real foreign debt burdens exploded, unmasking the
previously hidden structural problems). In that respect today’s problem in the eurozone isn’t
that different: deficits and debt loads which work fine at a 4% interest rate no longer work
when Mr Market prices them higher. During these halcyon days of worldwide low “risk-free”
yields, the rest of the world’s indebted governments should be paying attention …
In other words: violent protests like this one coming to a city near you (in Europe).