European Debt Woes Heat Up, But No Four-Alarm Fire

Investors shoot first and ask questions later whenever rumblings about massive debt loads come up these days. The sharp sell-off around Greece's woes is the latest example. And for good reason: Those singed by reassurances that sub prime loans were only a tiny fraction of the overall mortgage market and that the corrosion was therefore contained by experts slicing up the numbers, won't soon forget the beating they took.Still, traders now rush to put any concern about debt loads, ranging from Europe to Dubai to commercial real estate, in the same bucket as the sub prime conflagration three years ago. But investors should also take a hard look at the massive differences this time around as well and the jitters that are likely to follow. Greece is showing signs of approaching a resolution, but other countries such as Spain are now turning into an even bigger source of anxiety. That may, in fact, present a buying opportunity for investors who are able to stomach the volatility.

And there are plenty of signs that investors are now getting carried away. The economies of the European countries that have thus far been the biggest source of concern are relatively small, for starters. Some perspective: Greece's economy is in between Michigan and Ohio's, in terms of GDP, while Portugal's is a little bigger than Maryland's as some analysts have pointed out. Add in Spain and Ireland and the total is still a relatively modest 20% of the Eurozone's GDP -- not enough to present a major drag to a recovering global economy even if major stumbles remain ahead.

Indeed, other major economies gaining steam probably present a bigger near-term headwind to stocks than Europe's staggering, given Wall Street's perverse logic. The prospect of the U.S. Federal Reserve reigning in liquidity is now on the horizon -- a development that hit the stock market on Wednesday -- as the U.S. economy shows signs of recovering. China, meanwhile, has been scrambling to curb bank lending as GDP growth now again resumes to a blistering 10%. Dampening demand because of cooling in China, which has an economy about 12 times the size of Greece's, has rightly battered markets in recent months.

Major concerns about the viability of the Euro have also grabbed headlines and created another source of massive uncertainty for investors, meanwhile. Greece's struggles do raise some very valid policy concerns -- so many dramatically different economies under one currency hurts flexibility and the union is hardly as happy as some had hoped a decade ago when it launched -- many of the Euro's benefits are probably getting overlooked amid the turmoil as well.

Investors need look no further than Iceland for a vivid recent illustration of the carnage that can be brought on by a floating but thin currency, among other factors. After soaring amid the global credit bubble, Iceland's krona got ravaged when the tide turned and a currency in freefall made already stratospheric debt loads even more insurmountable. The krona tumbled to ratings just above Zimbabwe and Turkmenistan currencies.

Time to Buy Greek Government Bonds?

Little wonder, then, that investors like George Soros, probably the world's most skilled currency speculator, are predicting that Greece will take all measures to remain part of the Euro zone and resolve the crisis even as conflict and posturing at home reach a fevered pitch. (Indeed, Soros recently said that battered Greek government bonds may actually present a good investment opportunity, suggesting that investor panic may be overdone.)

Finally, investor paranoia at any hints of credit issues this time around, presents a sharp contrast to the complacency that reigned in the summer of 2007 as the sub prime crisis brewed and could prove the decisive factor in averting calamity, even as it presents buying opportunities, this time around.

U.S. authorities underestimated the extent of the sub prime crisis and let Lehman Brothers fail, figuring that market forces would sort things out. Of course, how deeply Lehman was intertwined in financial markets was missed and what followed was a nuclear winter in the credit markets as fears about the solvency of counter parties trumped all other considerations.

This time around, anxious authorities and investors are reacting to any traces of smoke as if it were a four-alarm fire. The panic may be overdone, but it is also helping to keep real disaster at bay.
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