Saturday, 17 March 2012

Is it a ‘good time’ to buy Euro debts now?

I refer to an article written by The Temasek Times on 17/3/2012, titled "Lee Kwan Yew: It's a 'good' time to buy Euro debts now"

According to the article, Mr Lee Kwan Yew said that "Now is a good time to invest in distressed and undervalued European assets, euro debts and euro bonds". Pushing all his contradictions aside, what i'm more interested in is whether his words can be taken as true.

In terms of "Buy Low, Sell High", what Mr Lee said isn't wrong. A lot of rich Chinese are buying up European properties, and if they continue, the property market in there can see some hope. But a country's economy isn't decided by only its properties. And the problem here is that the euro zone is NOT a single country, it's an ENTIRE GROUP of countries, that's why it's called the EURO ZONE. Because they share the same currency, if one country screws up, another country's success will mean squat. That's what's happening now. Because of Greece's debts, the whole zone is in deep s*** right now.

Here's problem 2. The European Union won't (or can't, or both) bail out Greece. If you read the news (or listen to the radio), The big guns up there can't decide whether to continue bailing out Greece or not. From what I hear, Germany isn't willing to continue doing so. If they decide to stop helping, Greece will have to default on its debts. When that happens, other smaller countries with huge debts will follow suit (remember the PIIGS?), which will cause another wave of economic crisis, when the current one isn't fully solved yet.

Problem 3. Other countries are not willing/able to bail out Greece. USA is swamped with debt right now, and other countries do not have the capacities to bail out such a big economy. People are now looking to China, with it's huge economy and reserves and all, but they forgot that China is just an emerging country, and it's economy is rather new and unstable. China wouldn't want to risk it's economy to bail out something as huge and complicated as the euro zone. So what if its exports to Europe decline? It's better to lose an arm than to lose your entire life right?

And here's the biggest problem which will cause more problems in the future. The euro countries are fundamentally different right from the start. Some are big, some are small. Some are richer, some are poorer. An example I read from somewhere some time ago clearly illustrates this point.

Here's the example: Germany and Greece produce bicycles. Because of Germany's resources and capacities, it can produce and sell bicycles at $1000 each. On the other hand, Greece can only produce the same bicycles at $1500 each due to it's smaller size and resource limitations. Because of that, Greece's goods are unpopular. Greece wanted to devalue it's currency so as to attract more buyers, but because it shares the same currency with Germany, it can't do so. In the end, they decided to borrow a lot of money. When they can't pay, they borrowed even more.

It's an extremely simple example, but it clearly illustrates the differences between various euro countries. Unless they iron out this fundamental problem, the euro zone will only encounter more trouble, even if they manage to solve the current one.

p.s. In case you don't know what the PIIGS are, it represents the countries that have big debts and are most likely to default on it. They are Portugal, Italy, Ireland, Greece, and Spain.