Investors have grown increasing weary of the continuing saga surrounding the Greek debt crisis, and understandably so. When the crisis first emerged in 2010, investors questioned its potential impact on the health of the global economy and whether the eurozone alliances might crack under the weight of unsustainable sovereign debt loads. That hasn’t happened, so far. Today, the financial market’s reaction to another deal, which simply kicks Greece’s debt crisis further down the road, has been muted.
Yields on Greek ten-year bonds have rallied on the news and temporarily dipped below 7%. Longer-term, the question remains: Can Greece ever repay a debt load equal to 180% of its gross domestic product (GDP)—especially in light of an economy which continues to contract, shrinking by more than one fourth since the financial crisis? Economic misery is projected to continue in Greece as burdensome austerity measures sap consumer demand and keep the unemployment rate high. It now stands at 24%.
Even as the relevance of the Greek debt crisis wanes for financial market performance, investors are increasingly focused on the list of potential distressed sovereign borrowers next in line for an International Monetary Fund (IMF) bailout. The dramatic recovery in the price of oil has taken some of the pressure off struggling commodity producing nations, such as Venezuela and Nigeria.
However, the IMF remains concerned about the risks posed by emerging market borrowers and financial market stability. With another rate increase by the Federal Reserve looking more likely this summer, equity and credit markets may again face pressure from the toxic effects of a stronger dollar and lower commodity prices on many emerging market borrowers.
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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