Fulcrum Asset Management has some analysis on the current cost of Europe’s current crisis. The $1 billion asset manager, which has several different hedge funds, thinks cost will run into the trillions.
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
Spain and Italy noted as the country’s most needing financial assistance. The price of that assistance might dwarf anything the Eurozone has to offer and rock the region’s stability.
One of the options that may be taken is a step toward mutualizing the debt of the Eurozone countries. That strategy would be the purchase of secondary government debt, and lending to financial institutions under the terms of bailouts.
Steps toward moulding Europe into a fiscal union will be outlined at the end of this month in another summit. Fulcrum concentrates on one likely option, the purchase of debt by the European Financial Stability Fund, the EFSF, and the European Stability Mechanism, the ESM.
The EFSF has 400 billion Euro, though 284 billion of that has already been lent out. The ESM will have access to an additional 500 billion euro when it comes online. That fund will probably become available in July after countries representing 90% of the capital have ratified it.
Before that money even comes on line 100 billion euro of it has already been promised to Spain in order to stave off a financial melt down. That leaves 400 billion of this new money in play to help save the Eurozone and restore stability. It simply isn’t enough according to the analysts at Fulcrum.
The Spanish Government’s refinancing needs add up to 564 billion euro through the end of 2014. Italy’s refinancing needs add up to around 997 billion euro for the same period. This leaves the total refinancing needs for the countries at 1,560 billion euro. At today’s rates that adds up to about $1,950 billion. That clearly dwarfs the 400 billion euro in the fire walling funds.
This remains alright as long as the countries retain power to access the markets. Spain’s access is already in doubt following its disastrous financial situation earlier in the summer. Italy looks strong right now, but additional pressure on the Euro, coupled with growth problems at home could thwart its access as well.
This situation leaves a confused future in store for the Eurozone’s debt markets. Without outside help, it appears that the union would be unable to support Spain if it was driven from the markets. If Italy were in trouble, solutions would have to be miraculous to have any effect.
That leaves the solution coming from outside. The IMF might be hamstrung by a US presidential election later in the year and the European Central Bank has yet to express any interest in direct intervention in bond markets. China may become interested, but has problems of its own.
This assessment is based on one of the worse situations that could occur in the Eurozone. It would require both Italy and Spain to be divorced from market rates and the current constraints on possible lenders to remain in place.
The assessment is not far from reality however, and its implications should be taken into account by investors with any exposure to Europe.