Sovereign Debt, Austerity, and Contagion: Prepare for the "Debt Tsunami"

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Sovereign Debt, Austerity, and Contagion: Prepare for the "Debt Tsunami"
Europe's Bourses Lead Europe's Economies

By Bob Stokes
Tue, 21 Jun 2011 17:15:00 ET

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"The Greek crisis is the front edge of a debt tsunami....the crisis will not stop in Athens..."

European Financial Forecast, March 2010

Please note the date of the quote: European analyst Brian Whitmer wrote those words around the time Greece's debt crisis first began to make the news.

Indeed, in the 15 months since his forecast, the European debt crisis has spread well beyond Athens.

If you follow the news you know that Ireland's been bailed out, and that Portugal's government collapsed under financial strain. And Reuters just reported (6/17), "Moody's Investors Service said it may cut Italy's sovereign credit rating..."

Bloomberg reports (6/19) that European banks "...haven't raised sufficient capital or cut loans enough to withstand the contagion that may follow a [Greek] default."

Moody's says it's putting France's top three banks under review for a possible credit rating downgrade due to Greek debt exposure.

France is part of "core" Europe; so is Germany, which is the continent's largest economy and "the biggest guarantor of the aid packages to Greece, Ireland and Portugal."

Will the financial crisis spread from "peripheral" Europe to "core" Europe? Is that the "next phase" of Europe's debt crisis?

Watch the action of European bourses -- because as Whitmer said in a June 17 interview with Yahoo! Finance: "The [European] markets are...predicting where the debt crisis is going."

Why look to Europe's financial markets to predict how the debt crisis will develop?

Because the price trends of Europe's bourses reflect Europe's collective psychology in action. Stock markets lead economies. In a June 3 interview with Germany's financial website Wirtschaftsfacts.de, Whitmer described how markets unfold ahead of economic developments:

"[Europe's] stock markets are moving ahead of the debt crises and, therefore, have predictive value. Greek and Portuguese stocks, for instance, topped way back in October 2009, after a small countertrend rally from their 2008-09 lows. The Irish ISEQ index peaked in April 2010. All three markets have trended lower for more than a year."

Several more European bourses have recently trended lower. Those downtrends -- and the renewed focus on Greece's debt problems -- started several weeks ago at about the same time. This shift toward pessimism was no surprise to Whitmer. Even while bourses were still rallying late last year, he wrote this in the December 2010 European Financial Forecast:

"...every [sovereign debt] solution authorities try to come up with will provoke public ridicule, condemnation and outrage. That day of reckoning remains in front of us."

Indeed, demonstrators are in their fifth week on the streets, to protest Greece's budget-tightening measures:

"Persistent protests in Athens' Syntagma Square show that the Greek people feel increasingly disenfranchised with their political system and...the growing separation between the government and the population over austerity could prove 'explosive'."

CNBC (6/20)

Greece did reach an agreement with the International Monetary Fund and the European Union on a five-year austerity plan, according to Reuters (6/23).

Does that mean European authorities have gained control of the sovereign debt crisis, or is the "debt tsunami" unstoppable?

Learn Brian Whitmer's analysis of European bourses and the sovereign debt crisis in the latest European Financial Forecast -- you may follow this link for your risk-free read>>

Tags: bailouts, credit crisis, credit rating, european central bank, European Union (EU), eurozone, Greek debt, Irish debt crisis, soverign debt crisis

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