Looking forward, I believe a worsening eurozone crisis can still be avoided if European politicians get more aggressive in addressing their region’s problems. However, until we see more clarity from European policy makers, equity investors may want to consider maintaining a defensive posture as Europe remains a major risk for US stocks as well as for the US and global economies.
Market Realist – A “Grexit” (Greek exit) matters, as it could leave the Eurozone in a vulnerable position.
Many economies in Europe’s periphery are facing a crisis. Greece is a prime example of that crisis. Greece had spent beyond its means, and it ended up over-leveraging. It had to suffer the consequences, as it almost defaulted in 2012.
Greece had to undergo an austerity program (increased taxes, cuts to government expenses, or both) in order to meet the bailout conditions of the Troika. The “Troika” consists of the European Central Bank, the European Commission, and the International Monetary Fund. This move was necessary in order to mend Greece’s broken balance sheet.
On January 25, leftist Alexis Tsipras led his Syriza party to power. Syriza opposes the austerity program. If Greece doesn’t meet the austerity condition, Greece could be out of the Eurozone. Spain (EWP), Portugal (PGAL), and Italy could follow suit. On February 28, the extension of the current Eurozone-backed bailout program will expire.
Read Market Realist’s When It Comes To Europe, Look for Value And Expect Volatility for more on why Europe matters to US investors.