The Euro Credit Panic - Phase II

by: Chris Damas

If you were going to declare Bankruptcy, but you had some room left on your credit card or line of credit, wouldn’t you wait and go out on a little shopping spree before calling up the bank with the bad news? Similarly, Greece WILL default and withdraw from the eurozone. It’s not a matter of if, but when.

For the record, I am Greek-Canadian, and love both my countries. I have never declared bankruptcy.

I know Greeks are generally a hardworking, proud people, in spite of all the bantering about their swimming pools not being declared for tax purposes. But I think Greece is in an untenable economic situation. The union pressure and the economic slump (tourism representing 17% of GDP will be hammered) will get too large, they’ll cry “Uncle Stavros” and quit the IMF austerity programme.

Here’s our forecast made almost two months ago, when just about every pundit was breathing a sigh of relief that Merkel and the EU had grudgingly announced a “mechanism” in case Greece needed it, with no details. Then, a few weeks later, ECB head Trichet stated at the press conference when the crisis had worsened “Default is not an issue for Greece”. Yes, and I have a Greek bridge paid for by EU loans, to sell him.

Here’s a quick mini-Quiz on sovereign defaulters that got away with it:

What country in this decade accepted a $40 billion IMF loan after agreeing to more austerity and economic restructuring, then defaulted on its external debt, 11 months later? Greece in 2010?

No, Argentina in 2001/02. Argentina devalued the peso a month after their unilateral default on December 23, 2001, and the years that followed saw great GDP growth numbers (all measured in pesos however).

So we see Greece devaluing sometime this year, perhaps by the end of the summer, although events are already moving rather briskly to this conclusion. The motivation for Greece to do the same will overcome any moral suasion from Germany, if the eurozone isn’t already pared down by that time.

Timber stocks and housing

Why are we holding pulp, lumber and forest products stocks in this environment, given our beginning of the year economic forecast was for the high USD to put pressure on commodities such as oil and grain crops? Well, we certainly have suffered some volatility, in particular in the U.S. timber REIT sector, as again, they are facing a higher currency headwind in the USD. The Canadian forest product producers are benefitting from a lower Canadian dollar which could help maintain margins even though prices may weaken.

I am a believer in a domestic “made in the USA” recovery (we’ve seen that happen in Canada) aided by the silent partners over in China keeping demand for products and services buoyant, even while Europe is voted off the island.

I see the U.S. new housing slump ameliorating if not returning to higher levels, aided by low U.S. short term interest rates and mortgage rates, helped by the credit crisis in Europe. There is also the R&R demand for building materials. Look for Lowe's (NYSE:LOW) and Home Depot (NYSE:HD) earnings on Monday and Tuesday this week, respectively, for signs this sector is still buoyant.

Will we see a market “Crash” due to the disintegration of the eurozone?

Firstly, I don’t believe that will happen in its full force. We saw a Panic on May 6 and we’ll probably see another one. History shows panics last more than a day. They usually shave off 10-20% of a market index and it takes 20 trading days, not 8% in 9 trading days as we saw culminating on May 6. Secondly, yes, the fears of a euro zone meltdown (aided by Sarkozy today threatening to withdraw from the euro), could cause some sickening drops. But I believe these will be sorted out before they get out of hand again.

Gold and the dollar rates

We sold 75% of our GLD trust position and I see Gold is turning down, substantiating that the crisis will be dealt with in the short term. In fact, I would think the ECB is already trying to rally the Fed and the Banks of England and Japan to intervene and support the euro and depreciate the USD, just as they did during the Plaza Accord on September 22, 1985. That accord took the speculators out to the woodshed and the USD declined.

My only real worry, is that Americans all rush to take a European vacation before that happens, rather than pay down their ARM’s and sub-prime mortgages that are coming due this Summer. The Cassandras calling for an adjustable mortgage meltdown may be right (supposed to peak in July), but what if U.S. short-term rates are rock-bottom then – could be a non-event. Look for Fed meeting minutes to be released next Tuesday at 2pm for clues as to how the Fed was thinking on April 26-7.

Look for a good National Home Builder Price Index released on Monday at 1 pm EST, and great U.S. April Building Permits and Housing Starts next Tuesday at 8:30 am.

Disclosure: Long BCE (NYSE:BCE), Telus (NYSE:TU), Canadian forest product stocks, U.S. Timber REITs