On February 23rd, I wrote an article on global debt. I found it was highest in Europe, the US, and Japan. I urged investors to get out of those countries and invest in Asia and Latin America, both because debt in those regions is lower and because they are already emerging from the global recession. It is time to review the situation.
Europe et al
Greece represents only the tip of the iceberg in terms of political and economic problems facing Europe. Consider debt first. It is one thing if a country’s debt is owned by its citizens. Then, debt service simply represents an internal transfer. Things get stickier when debt is owned by foreigners, and debt payments must be made in hard currencies. Table 1 provides information for selected regions and countries on external debt as a percent of exports. This ratio is of interest inasmuch as exports are an overall indicator of a country’s ability to service its external debt.
Table 1. – Debt and Deficit Ratios for Selected Regions and Countries, 2009
External Debt to Export Ratio
Government Deficit to GDP Ratio
Europe, US, Japan
Take a look at the Table. How do you think Germany and The Netherlands feel about being part of an economic group using the same currency as Greece? And what is really happening to Greece? If Greece had its own currency, it could simply print money. This would be good for Greece: it would provide an economic stimulus which the country needs inasmuch as its unemployment rate exceeds 11%. But because it gave up its own currency and now uses the euro, it can no longer print money. Why is this an issue? Because it is running a government budget deficit that is 9.4% of GDP. What happens if the government can’t borrow money? It will have to cut expenditures back to what it takes in. the CIA estimates its expenditures at $142 billion and revenues at $109 billion. To “live within its means,” the government would have to cut expenditures by $33 billion or $23%.
There is not a long line of eurozone members eager to help Greece out. Instead, the IMF has moved in. The IMF has received very bad press because it is not good at helping countries emerge from recessions. But as a former IMF staffer, I can tell you, the Greek situation is made for the IMF: it will make its loans contingent on government cutbacks. The cutbacks will send the unemployment rate much higher. Never mind.
You might note that the United Kingdom also has a worrisomely high debt/export ratio. It is running a budget deficit of 12.8% of GDP. But it has its own currency, and it can simply print more money. And printing money won’t cause much inflation because its unemployment rate is still 8%.
Consider now Ireland, Portugal and Spain, all euro users. All have high budget deficits. Is anyone likely to lend them euros? Are they also candidates for IMF “stabilization programs?” They have to be: with their large government deficits, they are running out of euros. Spain has an unemployment rate of 19.1%, Ireland (13.4%) and Portugal (9.6%). These rates will all increase when the IMF is brought in. There will be more riots in the streets. The situation of these countries is grim.
How much better is the US situation? Like the UK, it has its own currency, so it can continue printing money until the unemployment rate comes down. This has led me in earlier postings to urge betting against the dollar when investing.
For almost a year, I have been urging people to invest in Latin America and Asia. Why? Because they have low debt and have already emerged from the global recession. More broadly, I have recommended betting against the US dollar via emerging market investments. In Table 2, I provide data on how those investments have fared since I first made them on June 11, 2009. I have broken the results into two parts. First, how well they did until just before European debt worries started taking the S&P 500 down (April 23rd) and from that date to the present. In include how my own investments have performed as well.
Table 2. – Investment Results
Emerging Markets (EEM)
Latin America (PRLAX)
South Korea (EWY)
South Africa (EZA)
Investing is a humbling experience. Maybe it is just a random walk, but hopefully we learn from it. Overall, my recommendations did somewhat better than the S&P 500 until the debt worries hit. But as we have learned from past episodes, when panic hits, people feel safer in dollars.
Apparently, debt levels and growth prospects really do not matter. We have discussed debt above. And Table 3 provides growth prospects. High income countries are still dealing with the recession and debt. Developing countries are not.
Table 3. – World Bank GDP Growth Projections
East Asia and Pacific
Latin America and Caribbean
My own view? Europe is in a political and economic mess with only extremely painful solutions available. This has generated considerable uncertainty and some panic worldwide.
For reasons discussed above, I will increase my emerging market portfolio in the near future.
Disclosure: Author long PRLAX, MINDX, EWY, MCHFX, EWZ, EZA