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Is Another Euro-Zone Crisis Brewing? 

Neil Dwane 

Perspective on Europe 

7/15/2013 

Political instability, austerity pain, funding troubles and rising interest costs have reemerged to threaten the stability of the euro zone. Investors should be prepared to buy on the dip, says CIO Equity Europe Neil Dwane.
The euro-zone debt crisis returned to hit the headlines, with political instability, austerity pain, funding troubles and rising interest costs dragging investor sentiment lower.

A fresh political crisis is brewing in Greece and Portugal. Greece needs a new installment of 8 billion euros, which the IMF are insisting someone else pay – preferably the EU. Should more haircuts be on the horizon for Greek debt holders, only the ECB¹ and other member governments will get hurt this time. It is unlikely that the German government would agree to a haircut ahead of the September election. Portugal, and to a certain extent Spain, have experienced a significant shakeout in the debt markets, following a period where investors put leveraged money, borrowed from central banks for nothing, to work in higher yielding assets, i.e., emerging markets or peripheral euro-zone debt. Many such investors in the peripheral bond markets have recently become forced sellers.

On top of this, serious cracks have emerged in the Portuguese government, likely leading to new elections bringing that favourite market characteristic back to the fore again: uncertainty!

We also are carefully watching events in Cyprus, where there is a growing risk that the government may enter a period of increased tension with the EU. This would place a severe strain on Greece's market (again) and ignite more concerns about a deep political and economic crisis.

Investors should watch market developments carefully and use the weakest days to consider building equity positions and take advantage of more attractive valuations to invest in highquality stocks.




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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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