This situation is akin to a company facing financial crisis. You borrow at higher than market rates due to the higher risk of default and this adds to the company’s debt cost. The problem is that failure to improve could hinder the company from borrowing again and could set the wheels in motion for further weakness down the road.
Greece is facing the similar issues as a company in financial trouble. Facing severe growth and debt hardships, Greece needs more capital for debt payments or it will face collapse. The problem is that the country will likely fail to attract any debt investors due to the extremely high risk. As such, the country is looking at additional European Union (EU) or International Monetary Fund (IMF) loans of 50 to 60 billion euros (US$71.75 billion to US$86.09 billion) to help with operating the country in 2012 and 2013. In exchange, Greece is looking to sell off some of its state-owned companies.
While Europe has not been in focus in the recent months, my investment advice is that you should not ignore the massive debt and deficit problems plaguing Europe.
Without renewal in Europe and other foreign markets, we cannot expect a sustainable recovery. This is basic economic analysis.
There is also continued speculation that Portugal will need to seek emergency funds to stay afloat. When the country is paying out an enormous 7.9% on its 10-year bond, this cannot be good. Yet, the high rate is required to attract investors due to the high risk of holding Portuguese bonds. The problem is that Portugal is broke and cannot continue to pay out high-yielding bonds. The country will need to reorganize its financial structure and try to renew its economy and finances. Standard & Poor’s cut its view on the country’s five biggest banks.
While Portugal is not a significant player in the EU, weakness there could impact other countries, including neighbor Spain, which also needs to raise more capital. The latter country remains in a risky position. The problem is that Spain is a major global player, with its economy being the ninth largest in the world.
Take a look at the comparative growth rates. In Europe, there are concerns with the slow growth there. In Germany, the gross domestic product growth in 2011 is estimated to fall to 1.4%. In comparison, the U.S. economy is predicted to grow about 2.4% in 2011.
I feel that Europe may continue to underperform the global markets in 2010 and 2011.
In Europe, the 27-member EU is critical to the global economic recovery. There are over 500 million people in the EU, accounting for about 28% of the world’s gross world product in 2009, according to data from the IMF.
The problem is that the big countries such as Germany and France are supporting the weaker members who cannot survive on their own at this time without capital infusion. This is not good and will hamper growth in Europe. The trillion-dollar austerity measures will take away from investing in the country’s growth and economic renewal.
The last thing the EU wants is weak members dragging the member group down, especially at a time when the region is trying to rebound from the global recession.
The reality is that the global economies are interlinked and problems in one region of the world will have a domino effect on countries and regions thousands of miles away.
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