Beware of Greeks Bearing 'Debt'
By Gus Krafve
July 7th, 2011
As the first half of 2011 came to a close, both the Fed and IMF downgraded their projections for U.S. economic growth and talk of a "double dip" resurfaced. However, the stock market rally and stronger-than-expected economic data in the final week of June revived the hopes of some economists that maybe the worst of the downturn has already occurred. This optimistic outlook shared by some investors is based on a view that the first half slowdown was due mainly to rising energy prices and the dramatic downturn in Japan's economy following the devastating earthquake and Tsunami last March. On the back of this optimism, the S&P 500 rose over 4% in the final five days of June and is up 6.02% for the first half of 2011.
Continued concerns over a Greek default also roiled the markets in June. Greece has struggled with debt management since 2001, when it first joined the Eurozone. European finance ministers began expressing trepidation about Greece’s debt at the end of 2009. By the spring of 2010, a Greek default became a serious concern not only in European countries but also in how it could potentially affect the U.S. financial system. Heightened concerns resurfaced in June but have again been kept at bay due to the latest announcement of a bailout package. Although there has been no official agreement on the details, the ECB and IMF have both agreed to bailout Greece. Details of the bailout are to be hammered out over the next couple months and a formal package is set to be approved in September.
As had happened during the financial crisis three years ago, investors analyzed their money market funds for exposure to debt where an elevated risk of default had surfaced. As some of you may recall, it was during that period of time when we moved our client’s money from the Northern Prime Obligations Fund to The Northern Government Select Fund. Although there wasn’t a Northern money market investor who lost money, investors in other money market funds didn’t share the same fate after several of the funds fell below their $1 dollar net asset value due to exposure in debt of companies who defaulted. The ongoing developments in Greece’s debt crisis have led to investor questions about exposure to Greek debt and some of the European banks which own a considerable amount of Greek debt. As of June 17, 2011, the average U.S. money market fund had 44% invested in short-term debt of European banks according to Fitch, Inc. Given the continued uncertainty, we remain invested in the Northern Government Select Fund which only invests in U.S. government agency and treasury debt. At this time, we have no intention of changing our money market strategy for the foreseeable future.
It is clear that the historically high debt levels which are prevalent in much of the developed world will remain an issue for at least the next several quarters. Recently having had its debt rating downgraded by Moody’s, it appears Portugal isn’t far behind the problems in Greece. Spain and Italy are also headed down a similar path. Until there are resolutions to the debt issues here in the U.S. and abroad, expect volatility in the markets as the negative headlines surrounding these concerns come to the forefront.
We are honored by the confidence our clients have placed in us to manage their assets. We sincerely appreciate and welcome your referrals. Please contact us at 417-890-7770 or www.trustcompanyozarks.com.
