Good News From Europe, Though I Have Trouble Seeing It

If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem. - J. Paul Getty

Yesterday in Maybe I'm Not a Lazy Investor, I wrote a select list of items I'm watching with a little detail.  Today I've found multiple headlines that provide a glimpse of more detail. 

Dip Me in Axle Greece and Call Me Slick - (adapted from Pixar's Cars)

I’m just going to say it, I’m sick and tired of Greece. The sheer number of emergency meetings, delays to meetings, proposed plans that need to be renegotiated, more delays... it’s time to amputate the leg off already as what originally was a cut has festered into something gangrenous.

Now if you’re thinking, aren’t we trying to avoid that as it might cause a financial meltdown? Greece cannot pay back what has already been lent to it. The first bailout was for €110 billion. The second bailout being discussed is now north of €130 billion. Moreover austerity measures are imposing a full depression on the Greek people. So how can Greece achieve the growth needed to pay off its debts? It cannot.  Additional lending to Greece is simply throwing away money that could go to recapitalizing EU banks. I shake my head when I think about what if the EU cut Greece loose at the beginning - what would be the difference in costs compared to the never ending bailout?

That brings us to todays news from Marketwatch: Greek bailout hopes rise amid ECB concession

Talks between Greece and international creditors over a second bailout stretched past yet another deadline, but appeared to be moving toward a conclusion Wednesday after the European Central Bank reportedly agreed to exchange Greek government bonds at less than face value in an effort to further reduce the nation’s debt load.

In Maybe I'm Not a Lazy Investor, I stated:

Greece - will default. Honestly I don't know how anyone can classify a 50-70% loss on bonds as anything but a default. However, Greece is a known problem. Default is probably already priced in the market and may even be welcomed. What I'm watching here is how any last minute deal might apply to other EU countries in trouble.

It didn't take long after the ECB concession was announced for other financially distressed EU countries to want a fair deal. Reuters reports Irish want debt concessions if ECB aids Greece:

Ireland would see any European Central Bank contribution to the restructuring of Greek debt as a precedent that would boost Dublin's efforts to ease the burden of its own sovereign debt, the country's finance minister said on Wednesday.

I expect Portugal's relief request to swiftly follow. When the day comes where Italy and Spain again need help because austerity measures without labor market reforms choke their growth, it's better than an even money bet that they too ask for fairness.  The sad fact is fairness comes at the expense of the taxpayer.

France's Upcoming Election Risk

In Maybe I'm Not a Lazy Investor, I stated:

France - an upcoming election projects President Sarkozy to lose, which will inject a new risk as the next President may not follow the same policies.

Marketwatch reports: Francois Hollande will spark next euro crisis

With a first round in April, and a second in early May, Hollande seems a near-certainty to be the next president. The latest polls show the Socialist candidate beating Sarkozy by 45% to 30% in the first round, with the rest of the votes going to the centrist Francois Bayrou and the far-right, anti-euro candidate Marine Le Pen. In the runoff, the polls show Hollande winning by 15 to 20 points.

Furthermore Marketwatch reports:

First, he has no experience of running anything. A career party official, he had dedicated his life to the arcane inner machinery of the French Socialist Party.
...
Worse, Hollande has pledged himself to renegotiating the new fiscal treaty that (German Chancellor Angela) Merkel has just imposed on the rest of Europe, demanding strict adherence to balanced budgets over the medium term — a decision that almost certainly means the treaty will not be passed. A strong Franco-German alliance has been the key to keeping the euro together so far, but these two will hate each other.
...
Thirdly, Hollande has pledged himself to an old-fashioned borrow-and-spend program. What’s on the agenda? An extra 60,000 teachers, at a cost of 20 billion euros. Another 150,000 state-aided jobs. Higher taxes on the rich, and a financial transactions tax on the banks (although surprisingly, banking is a relatively successful French industry). A reduction in the retirement age from 62 to 60, when every other developed country has decided that longer life expectancy means people need to work longer as well.

So let me summarize: the French elections strongly favor a candidate wanting to expand benefits and the government sector by raising taxes and borrowing to cover the cost.  Deja vu as this is the same model that got Greece into its present situation.  With public debt of ~85% of GDP, it may only take a Hollande victory plus an EU recession for bond investors to see the resemblance.

About that EU Recession

With the governments of Greece, Portugal, Ireland, Spain, and Italy all cutting back via austerity measures, where will European growth come from?  Don't count on Germany.  Not only is it undertaking some austerity measures to balance its budget, but it's primary trading partners are cutting back on their purchases.  As Bloomberg reports: German Exports Slump Faster than Forecast as Crisis Damps Growth

German exports fell four times more than economists forecast in December as the sovereign debt crisis damped growth across the euro region.

Exports slumped 4.3 percent from November, when they rose 2.6 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted a decline of 1 percent, according to the median of 17 estimates in a Bloomberg News survey. French business confidence held near its lowest level in more than two years in January on recession concerns, the Bank of France said in another report.

While I'd like to be optimistic, I cannot see where the growth will come from in Europe to avoid a recession.

So How Does this Affect Me Here in the US

As the European economy weakens, the euro will also weaken versus the dollar.  A stronger dollar hurts US exporters in two ways:

1. It makes their products more expensive in Europe, so people there are less likely to buy US products.
2. Profits from Europe will fall when converted back into dollars due to the foreign exchange rate.

In other words, US companies may sell less and will get fewer dollars per euro of profit.  As the Fiscal Times reports, Eurozone spending accounts for 41% of S&P 500 revenue, which strikes me as a significant number.  So selling less + smaller currency conversion =  a good possibility that cheaper stock prices are in our future.