I am long the U.S. markets at the moment, as it appears that, on the margin, the domestic economy is improving. However, am still highly risk-averse due to the European debt situation. The markets appear to have breathed a sigh of relief that the Greek problem is now "solved," but I am not so sanguine. I believe the crisis is about to come back with a vengeance -- just when the markets are feeling most complacent about it.
First of all, Greece is hardly "solved." The austerity cuts are going to plunge this country into a deep recession -- and while this is undoubtedly a necessity, it will leave Greece unable to repay the remaining debt. I believe public debt holders will have to take a haircut later this year, rather the private holders exclusively shouldering this burden. The numbers simply don't add up. If getting debt down to 120% of gross domestic product over the next decade is considered success, I would hate to see failure!
More important, nary a word has been uttered about Portugal and Ireland. The debt burden there is nearly as bad as it is in Greece, and I see zero probability that those countries -- or, at least, their citizens -- will sit passively and keep paying on their full debt burdens. The Irish are especially at risk, given that the debt burden was dumped on the citizenry in order to bail out their bankers. The politics just don't point to an avoidance of default -- and this will probably happen soon.
I do believe Italy and Spain will be bailed out by the European Central Bank, which will continue to monetize their debt. In these cases, there is no other choice. The net result translates into a depreciating euro and a continuation of the debt crisis as it moves northwest from the Hellenic peninsula. The markets are not discounting this eventuality. So, as they say, be careful out there.
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