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Euro Resolution Likely, but Will Be Messy
After spending a week in Europe talking to scores of investors, it’s obvious that the Greek crisis has reached an inflection point. I’m convinced that the most likely resolution is one that, in the eyes of Germany, solved the most issues for the lowest cost. That is why I think the issuance of euro bonds is the high probability outcome.
Think about it: Germany found a way to artificially depreciate its currency by joining the eurozone, which made it more competitive in global trade.
Now the music’s stopped. With no solvent trading partners left in Europe, it’s likely that the breakup of the eurozone—or the departure of Greece, along with the second-order risks of other countries leaving—is more expensive than simply bundling up everyone’s balance sheets and issuing euro bonds.
Germany wasn’t the only beneficiary of eurozone synergy. The other member countries strapped onto Germany’s solid balance sheet and were able to borrow at lower rates than before. But if euro bonds are issued, there has to be a mechanism in place to punish member states that aren’t fiscally responsible.
I’m not sure what that mechanism will be. It could be a central treasury, but that seems extreme. At any rate, the path of resolution will likely be extremely rocky. Afterward, Europe equities could be a screaming buy—but for now, I’d keep some dry powder.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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