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If you read the current headlines, you would certainly think all is well in the European Union.
The major stock markets of Europe are trading near their highs. And the economic data has been improving.
So is the worst of the economic crisis over in Europe?
Not by a long shot!
I know … things look better in Europe on the surface.
The elections have passed, causing little volatility in the markets. And, the euro has responded by trading near 1.16 vs. the dollar, or about 10% higher against the greenback, for this year.
But in reality, nothing has changed for the better in Europe. In fact, things are getting worse.
Here’s what I mean …
Greece is poised to borrow money from investors for the first time since 2014. You read that right — Greece wants to take on more debt.
Observers expected the cash-strapped country to sell a five-year bond this week or the next. And this is all following another bailout.
In fact, Greece successfully received a 7.7-billion-euro tranche of rescue cash from its creditors earlier this month. That confirms it will avoid defaulting on its lenders this month.
And it’s not just Greece …
The looming sovereign-debt crisis in Europe is real. It will come sooner than most investors want to believe, and catch many of them off-guard.
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| The European Union is on the brink of shattering no matter what recent media reports may say. |
Here are some potential triggers:
The first is a potential reduction in the monthly 60 billion euros’ worth of securities the European Central Bank currently buys. The ECB’s balance sheet now stands at 4.23 trillion euros, making it the largest central-bank holding in the world.
The ECB is on track to unwind its stimulus next year. But my guess it’s likely to drag out the process. The rollback is set to start in January and take nine months. That’s up from the previously predicted seven months, and with future reductions announced one step at a time.
The second potential problem is Italy. The general election is due before next May. Look out if the Eurosceptic party called The Five Star Movement wins. Then we are likely to see panicked bond-selling.
And let’s not forget about the German election this fall. It could make waves if Angela Merkel loses ground heading into the September vote.
The third potential problem is immigration. Civil unrest is ramping up all over Europe. And one of the main drivers is the migration crisis. It’s putting countries at odds, and could be a potential tipping point that ultimately breaks up the union.
Then there are the ongoing Brexit negotiations. So far, this divorce is not going as smoothly as the two sides hoped for. I expect these negotiations to continue to challenge the two sides. And the result could have disastrous consequences for the EU.
The bottom line: Europe is still drowning in debt. The negative interest rates of Mario Draghi and the ECB have totally failed.
So here is my recommendation: Steer clear of any European sovereign debt of a maturity greater than one-year. Preferably, stick to high-grade corporate debt or you can go with 90-day Treasury bills or Treasury-based money markets.
Best wishes,
David Dutkewych
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Very good analysis.
If you recommend such safe items as Treasury bills, or greater than one year maturity on European sovereign Debt, or high grade corporate Debt, why did you not mention Hard Assets. Do you think the crisis in Europe is going to get better or worse?, and do you think Hard Assets will ever be recognized, the way old Europe embraced suck before WW II, before all the recent money printing everywhere?????? ( since the war).
Every thing is showing signs of weakness, but the pundents call it strength, when there is a up tick in all the WEAKNESS, and problems??? I don’t get it?
I will not point out the WEAK points. They are so obvious they scream, however there is always some exSPERT, that says there is strength.
What a world of Finance and fiat economies, that are strong????? LMAO
Europe is drowning in debt. What about the USA? Debtfree? You must be kidding.
Would trade rate of US dollar improve vs. euro in the next few months.
Thank you.
Hello David,
Good article and quite accurate, as I can attest for it having been a long time resident living in the EU.
However, I just wanted to point out that Spain and Portugal are in similar dire straits with Italy and perhaps may even top Greece.
Although, without a crystal ball one can’t say exactly what will happen.
Spain’s continual financial woes since 2007, weren’t fixed even with a couple of economic bailouts under Obama’s administration and IMF. The economic crisis in Spain has only been compounded by inept and often unqualified leadership mismanageming those funds.
Not too mention the shear amount of corruption within Spain’s controlling political party the ”partido popular.”
The partido popular, under the misguided and often questionable leadership of Mariano Rajoy, has been draining the Social Security pension fund for about the last nine years.
As the President of the Spanish government, Mariano Rajoy, has been earmarking the payments of everything from unemployment checks lasting in some cases as long as 3 years, to welfare aid to illegal immigrants and or assylum seekers, to paying high IMF interest on the bailout funding stimulus package.
According to published Spanish governmental sources, the Social Security pension fund will be completed empty by January 1st 2018.
This will be a disaster only tantamount to Greece’s ongoing nightmare.
I believe that we may just see a global depression’s domino effect kicking off in the Mediterranean.
I am just a layman, but, everything appears on a regional and global level to be forming the perfect storm.
While EUROland has problems, it is no different from USA. For Greece, read Illinois that is effectively Bankrupt. The Five Star movement has recently failed to gain local municipality elections, so what hope for National elections. If Merkel loses, the probable winner is 90% identical on pan-European policy and only has a more left-wing manifesto on pay for the workers. Europe is drowning in debt & Mario Draghi is dancing on a razor’s edge…what about Yellen and US debt (Auto Loans as well as underfunded Obamacare that Trump was unable to destroy)? As for BREXIT, the EURO-crats were well prepared while UK negotiators are like the Three Stooges and 90%+ of the collateral damage will fall on UK. US has an improving employment trend…but mostly in low end jobs, while EUROland has modest improving economic growth & reducing unemployment. So if you steer clear of European Sovereign Debt, also steer clear on US Municipal & State Debt and any derivative with the word “Auto” in it.
Yes 2019 will a challenging year for the Europeans in those associated with the Euro .
EU on the brink!