Greco-Roman wrestling is a permanent fixture in the Olympic Games. But little did we guess that this would play out in the financial world, and that it would have to wrestle with the quagmire that is Greece and Italy.
Both Greece (Debt-to-GDP – 143% in 2010 – Eurostat) and Italy (Debt-to-GDP – 119% in 2010 – Eurostat) have lived beyond their means. When expenditure cuts and raising revenues should be the focus, the countries appear to be dithering. It is a bitter pill for spendthrift governments and more so for the disenchanted masses.
Raising taxes and cutting salaries, and years of prolonged hardship that would follow do not make for an exciting future. Delays in finding a solution and the squabbling European nations, Germany and France in particular, are not helping matters.
The crisis is deepening, and one indication is the weakening Euro vis-à-vis the Dollar over the last month. Growth forecasts have been cut by most European countries. Construction output (down 1.3%) and Industrial production (down 2%) data are discouraging. Unless, the Eurozone member states demonstrate a resolute effort in tackling the crisis, there is no clear solution in sight.
One sector to watch out for is Banks. According to data provided by the Bank of International Settlements (BIS), U.S. banks have an exposure of $767 billion to the European debt market. Credit Default Swaps ($518 billion) and direct lending ($181 billion) are the major parts of this exposure.
Many of the U.S. mega banks including Goldman Sachs (GS), Morgan Stanley (MS), JP Morgan (JPM), Citigroup (C) and Bank of America (BAC) have significant European exposures.
Conclusion
The political class needs to narrow down their differences and show more will and courage. As the world watches and time runs out, a solution needs to be found quickly.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
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