Pizza Hut Logo on the Parthenon: Euro Debt Woes Affect Us All

Europe's Debt WoesThe markets tanked today partly on concerns that European countries have no way out other debt crisis.  It is an interesting economic study to look at Europe compared to us here in North America.  A lot of times I think here in North America we have the tendency to think we are the centre of the world.   However, in Europe our friends have cleared a whole world of their own.  Paying for it has certainly become a problem.

As many of you know, every day I comment on the agricultural commodity markets for several publications throughout North America.  By default, I am always commenting on the price of copper, gold and crude oil as well as the value of the US dollar.  All of these commodities now work together to impact each other and their effect on the grains is significant.  Add the European debt crisis to the mix and understanding commodities just get that much harder.

The euro zone debt crisis is a bit like being grossly overweight.  There are many people that are grossly overweight but survived despite that.  In fact there are many people overweight, in fact, most Canadians who live relatively long lives.    If you are one of those Canadians who has shed a tremendous amount of weight and feel better for it, you’ll know what weight does to you.  It’s a real drag.  That’s what the European debt crisis is like.  As long as European governments can make their interest payments and pay back the debt, everything is fine.  However when the debt reaches epic levels like it has in Greece, Italy and Spain, sometimes it gets to be too much.  The elephant in the room cannot be avoided.  Debt has to be shed or serviced somehow.  So every once in a while the European debt crisis rears its ugly head to the detriment of economies around the world.

A case in point was last Monday when agricultural commodities went up strongly in the Sunday night overnight session.  There’s been tremendous difficulty getting the US crop planted in the eastern corn belt and traders were reacting by pushing agricultural prices higher.  However, news hit the market of the three notch degradation of Greek  debt, along with concerns that Spain and Italy would not be able to service their debt either.  That caused a flight to the US dollar as capital was looking for a safe haven.  Not only did commodities of all types go down that day, but Wall Street markets plunged.

The problem is government debt is too high and collectively it must be shed.  In other words, some European governments have got too fat.  You can make the argument nobody has more debt than the American government but there is a big distinction.  Countries like Spain, Italy and especially Greece don’t have the economic heft to pay their debts, and they are using the Euro, which they don’t control. So they are in the unenviable position of not being able to inflate themselves out of their own debt problems if they controlled their own currency.  The Americans have been printing money like crazy through their quantitative easing events to accomplish the same thing.  They have the biggest economy in the world and the biggest guns in the world and the world’s default currency.  That counts when you have debts to pay.

Greece is the worst case in Europe.  The reason it is important is because any default from Greece is a big problem for European banks.  By default any problem for European banks is a big problem for US and Canadian banks.  So when there are ripples within the Euro zone, it always causes problems on our stock and currency markets.  Typically that means a run-up in the US dollar and gold.  Over the last couple of weeks the US dollar has been on a real tear, sending commodity prices downward.

So the Greeks are trying to build up something they call the sovereign wealth fund.  Essentially, this is a pile of money earmarked to pay off the debt made up of whatever it takes to get it done.  For instance, Greece is selling domestic assets such as stakes in the telecom firm OTE and the state owned Postbank and the ports of the Athens and Thessaloniki.( According to the BBC)  I don’t think you will see a Pizza Hut logo on top of the Parthenon, but maybe that is next.  A country with junk bond status, using the Euro doesn’t have many options.

So if you are an investor or just want to borrow a little money for home improvements, keep an eye on those Euro zone debt problems.  It isn’t going to go away very quickly.  It takes a long time to lose a lot of weight and it is the same thing with European debt.  So from time to time it will rear its ugly head to affect our markets.