Plans are finally being put in place to deal with the problems facing the Eurozone. In an article by Investec Asset Management, Jeremy Gardiner discusses the severity of the European Debt Crisis. For your convenience we have summarised the article below.
It’s now or never
- It’s never a good idea to throw good money after bad, the European Debt Crisis is no exception.
- Adding debt to more debt is not going to fix the problem. This temporary solution will only cause further problems down the line.
- Until now, bailouts have been plugging the immediate needs of countries in trouble, who promise to increase taxes and cut spending.
- Too much austerity medicine too quickly can destroy economic growth & push economies back into recession.
- Countries need to change their ‘siesta’ lifestyles & implement long term behavioural changes – many reluctant to do so.
- There has been much talk, but very little action – everyone is in denial about the severity of the situation.
- Now that people have accepted that Greece is going to default, this will shock the rest of Europe into taking proper action.
- Greece’s default will reduce their debt burden, but make it difficult for them to borrow in future.
- Although reluctant, China will need to step in because if the EU were to collapse, the Chinese economy will suffer.
- The recent downturn signals weakness ahead. However, a double dip recession is not expected to be as severe as the credit crisis of 2008.
- Anything is possible though, & should there be a European banking collapse, it will affect the entire global system, including China’s growth – a scary situation to contemplate.
So what should investors be doing?
- The simple answer is nothing.
- If you wanted to lighten your equity or switch out of the rand, you should have done that a while ago.
- Both the rand and the markets have taken a smack, but both are expected to retrace some of the losses.
- You need to correctly identify your risk profile, create a portfolio and have a long term strategy, ignoring short term volatility.