Jason Stipp: I'm Jason Stipp for Morningstar. Continued trouble in Greece and the Eurozone rocked the markets on Tuesday, on the heels of some sovereign credit downgrades.
Here with me to talk about the situation, and what it means for investors, is Morningstar Markets Editor, Jeremy Glaser. Jeremy, thanks for joining me.
Jeremy Glaser: You're welcome.
Stipp: So the situation, it seems like day after day you read that the situation has been improving. And then you read, oh, it's had a step back. And now, it seems like it's had a major step back. What exactly is going on with the Greece crisis, and the other countries, that are in trouble over there?
Glaser: You're right, Jason, there's been a lot of fits and starts in solving the Greece debt crisis. In the last couple of days, it seems to have gotten a lot worse. First, we found out that the budget deficit that the Greek government had estimated is actually going to be much worse than they first thought.
That the austerity measures that they put into place haven't really made a big impact in the amount of debt that the government has. Investors have gotten really scared, and the spread between a Greek bond and, say, a safer German bond have continued to widen and widen and widen.
People aren't convinced that the Eurozone and IMF joint bailout is going to make a big difference. No one knows exactly when that money's going to hit. There's some political problems with exactly how the European Union can actually do this bailout. So I think until people see that money, they're going to be scared of Greek debt.
We saw S&P downgrade Greek debt to junk status. But they also downgraded Portugal's debt a notch, which shows that there's a lot of fear that this contagion -- that this idea that we're going to have problems with Greek debt -- is starting to spread to other countries that have high debt levels.
Portugal, Spain, are some that are mentioned most frequently. It's starting to spread very slowly across the continent, and a lot of investors just don't know when it's going to stop.
Stipp: Here in the US, during the trading day today, there was a -- the market really took a dive. So, obviously, US investors -- you never know for sure what's causing it, but it seems like -- they're worried about this too. Is there a direct effect for US investors on what's going on over in Europe?
Glaser: Very narrowly. I don't think there's a huge direct effect with Greece in itself defaulting. I don't think a lot of US investors have much exposure to Greece. It's a pretty small market, so there's not a lot of companies that have -- are selling -- a ton of goods into Greece or getting a lot of exports from the country. I think the biggest problem is what it says about the state of the European economy, which is incredibly important to a lot of American companies.
Stipp: So if you were going to say then, that there's possibly an indirect effect, what things should be on our radars as potential risks here?
Glaser: Yeah, there's a lot of big ones. I think the first one is, just in general, the European economy seems to be recovering at a much slower rate than that of Asia, and other developing markets, and even that of North America. We've seen pretty good growth in other regions, but Europe still seems to lag behind.
GDP growth seems to be lagging a lot of other regions. It seems to be kind of a big problem. If you see countries are having trouble with keeping the currency stable and defaulting on sovereign debt, you're not sure that they're going to be there to continue to stabilize the banking system in Europe, which is much weaker than it is throughout the rest of the world at the moment.
It makes it unclear that they're going to get that growth, they're going to be able to purchase these products, and there's a lot of American companies that have a lot of interest in selling goods to Europeans. So that could be a big problem.
But I think there's a lot of other areas of instability that we could see in Europe. The UK elections that are coming up have a very indeterminate effect. It looks like the Liberal Democrats, who are coming on very strong, could end up in a coalition government with the Tories.
Something we haven't seen here, since the '70s, in UK politics. Who knows what the impact of that could be on monetary and fiscal policy? Who knows what the impact of further defaults, if it spreads from Greece, if it really hits Portugal, if it really hits Ireland, if it really hits Spain?
Those are much bigger economies that could have a much bigger direct effect on the United States. There's just a lot of question marks right now. Investors don't like uncertainly, and I think that has a lot to do with why the sell-off is happening.Read Full Transcript
Stipp: The market seems to be contemplating a lot of those potential things that could go wrong. So I guess if I had to ask you then, what you think the worst-case, and the best-case scenario, to come out of this, what should we be thinking as far as the outliers of worst and best?
Glaser: Yeah, I think it's impossible to know exactly what the worst or the best could be. But I think, in general, the worse-case scenario is that this is going to be the death knell for the Euro. And that we're going to see that people decide that this is not a good monetary union, and Germany is going to get fed up bailing out some of these other countries. And Greece will leave, and maybe some of the other countries will.
Who knows exactly how that would go. There's a lot logistical problems with actually getting rid of a currency union. It's something that hasn't happened a lot in the past, and there's just a lot of uncertainty surrounding that.
But if that were to happen, it could reduce European trade. We could see Europe falling even further behind the rest of the world and that could be a really big problem. That's something that people have been talking off and on, not necessarily seriously, but if these problems keep going, I think you're going to hear a lot more about the Euro itself being under siege.
On the best-case scenario, this could be a point where Europe kind of galvanizes behind the Euro and really strengthens it. One of things that's unusual about the Euro, versus say the US dollar, is that monetary policy, and fiscal policy, aren't being done in a coordinated fashion.
So the United States, you have the Federal government dictates fiscal policy, and the Federal Reserve does monetary policy. In Europe, the European Central Bank does monetary policy, but each individual country is responsible for their own fiscal situation.
So if a crisis like this gets Europe to come closer together, and brings a lot of their fiscal policies in line with each other, it could actually strengthen the Euro, and help trade, and help avoid a lot of those things that would happen if we would get into that worst-case scenario.
So if the bailout is successful, and they are able to get Greece out of this crisis, and stem the crisis happening in other countries, I think we could see Europe actually emerge stronger, in best-case scenario. But I'm not sure that's terribly likely.
Stipp: Well, we'll have to keep our fingers crossed in any case. Thanks for the contexts and the insights.
Glaser: You're welcome.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.