- Although critical details are still being worked out, the European Union’s (EU) recently announced rescue package for Greece is the broadest, most strategic attempt yet to deal with Europe’s sovereign debt crisis.
- The plan aims to lower Greece’s government debt-to-gross-domestic-product ratio over the next decade while containing potential short-term damage to the financial system, increasing the size of the European Financial Stability Fund (EFSF), and garnering support from private-sector investors and foreign governments.
- Greece, which must agree to the plan before it can be implemented, is experiencing serious political upheaval. It must first form an interim unity government and name a new prime minister before the proposed rescue plan can be voted on.
- Under the most optimistic outcome, the plan buys Greece, troubled European governments, and the European and global financial system some more time, kicking the can further down the road to be fully dealt with at a later date. A more pessimistic view is that Greece and its creditors will experience a disorderly debt collapse, and Greece will be forced to exit the European Monetary Union (EMU or eurozone, the countries that have adopted the euro as their official currency).
- Whatever the outcome, bringing additional clarity to the issue is likely to benefit financial markets and investors far more than the prevailing confusion and uncertainty.
…We are not in the camp of those calling for global recession, but we do not expect the world economy to do much more than continue to muddle along for the foreseeable future. While certain risky asset classes continue to carry attractive long-term price tags in our view, investor fear and risk aversion remain elevated, even after the recent equity rally. For the foreseeable future, the fate of world financial markets will continue to hinge in large part on the direction of Europe’s debt crisis, financial system and economy.