June 25, 2011 Leave a comment
The situation in Greece remains critical. This is due to the fact that the country has billions in debt and interest payments coming due in July, and they don’t have the money to make these payments. As a result, Greece needs the latest round of bailout funds totaling 12 billion euros from the European Union (EU) and the International Monetary Fund (IMF) in order to avoid bankruptcy. The key to getting these funds is the austerity vote on Tuesday. If the Greek parliament fails to pass this latest round of budget cuts and tax hikes, the EU and IMF have stated they would withhold disbursing these funds.
If Greece were to default on its debts, it has the potential to spark a market crisis similar to the Lehman collapse in 2008. While Greece itself is relatively small, a key risk associated with a Greek default is the uncertainty over exactly what financial institutions are exposed to the resulting final losses and to what degree. European banks would be particularly at risk, and the spillover effects could impact U.S. banks as well.
Given this crisis risk, it is important to determine how portfolios can be allocated to both sidestep any potential chaos and capture upside opportunity. The following are the asset classes that would be poised to gain in the event of a new crisis emanating from the Euro Zone:
U.S. Treasury Inflation Protected Securities (TIPS)
Non-Financial Preferred Stocks
Fortunately, portfolio allocations are already heavily emphasizing these asset classes. This is due to the fact that the U.S. Federal Reserve’s latest stimulus program known as QE2 is set to end on Thursday just two days after the Greek parliamentary vote. And all of the categories listed above are also among those expected to perform best once QE2 comes to an end. As a result, portfolio allocations have already been shifted toward these asset classes well in advance of current events. One additional point – while positions such as Gold continue to represent long-term investments, other allocations like U.S. Treasuries are more likely to remain in place for the short-term until current risk conditions start to fade.
In the end, it is probable that the Greek parliament will end up passing these austerity measures and will push their debt problem down the road a few more months. But “probable” is far from “certain”, so monitoring these events closely through the weekend and into early next week will be important. I’ll keep you updated.
And with the end of the quarter coming on Thursday, I’ll also be checking back soon with a preview for what we can expect in the upcoming third quarter of 2011.