THIS IS NOT INVESTMENT ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What to do about Europe?
The woes of Ireland may infect others and at a minimum have caused the Eurozone's strongest partner, Germany, to flex its economic muscle under the veiled threat of abandoning the single currency. Ireland's problems are severe and not isolated. Just a few years ago, Ireland was the Celtic Tiger with Europe's lowest corporate taxes and concomitantly very low unemployment. Prosperity unfortunately begat profligacy. Government spending on wages and entitlements ballooned, credit was cheap and plentiful and a housing boom ensued (sound familiar?) When the bubble burst in the US it caused a tsunami in Ireland. Consistent with the Basel II rules, the Irish banks had to write down huge amounts of assets which in turn threatened all credit in the country and caused the government to guarantee all of the banks' debt (e.g. deposits, cd, bonds, etc.). This stopped the bleeding for a while but in time caused the most recent crisis.
Unwilling or unable to do what was necessary in cutting government spending and raising taxes, the government itself became effectively insolvent resulting in the powers that be in the Eurozone (e.g. IMF, Germany and France) to fly into Dublin last weekend and to insist upon belt tightening in exchange for a safety net, low interest loan. Before adopting the Euro as its currency, Ireland could have handled these problems on its own by inflating their currency and paying back debt cheaply much like the US is doing under the guise of quantitative easing. But once Ireland joined the Eurozone, it ceded its currency to the European Union (read France and Germany). Spain and Portugal are the next bubble economies that are teetering and many wonder where will all the credit come from to bail them out.
Truly, this is a pan European problem because the money center banks of England, France and Germany hold huge amounts of Irish, Spanish and Portuguese bank and sovereign debt. Germany has chosen this crisis to insist on something it was unable to secure at the round of bank regulation rewrites at Basel this summer (Basel III). Heretofore, governments have bailed out "too big to fail" banks by guaranteeing deposits and debts including bonds, subordinated debt and trust preferred instruments such as the ones I have purchased. Chancellor Merkel wants the preferred share and debt holders even senior bondholders of banks to lose their secured status via a "bail in" (where bonds are converted to stock and presumably rendered valueless) before any government money is injected.
This is very upsetting to me, a holder of a considerable amount of the trust preferreds of DeutscheBank(DB) (DUA, DXB, DKT)and some of the Royal Bank of Scotland , the types of securities that are squarely in Ms. Merkel's sights. Today on the uptick, I took profits on my DB holdings and cut my losses on RBS. I am still invested in the preferreds of ING and AEGON which are more insurers than banks. In addition, I decided to lower my exposure to Europe generally, trading out of E, TOT (both oil) and TEF. I will miss the great dividends paid by the banks and these other Euro companies, but until there is more visibility on Europe I prefer to be safe, not sorry. Rule number one has been followed---do not lose principal.
Ford continues its march to investment grade status. Yesterday, my holding in FCZ were redeemed. In my hands they were paying over 8% in interest and I made over 8% on the principal in less than 6 months. Sorry to see them go.
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