The world’s debt crises (that’s plural!) have being going on for years now and it will be several more years before Europe gets a handle on its situation. The U.S. debt crisis was mostly about subprime housing mortgages, while Europe’s debt crisis (mostly Greece at this time) is about sovereign debt. Greece has experienced too much government spending with too little taxable income to pay the bills, and the European Union and the euro currency are now at risk (see The Cycle of Debt Must Be Broken for the Whole System to Correct Itself).
The recently released Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October has been waning on the euro currency. This manufacturing index measures changes in the business activity of thousands of eurozone manufacturers. The October index fell to 47.1, revised downward from a preliminary reading of 47.3 and down from 48.5 in September. Similar to U.S. manufacturing data, a reading below 50 indicates contracting manufacturing activity. This is now the third consecutive month that this eurozone manufacturing PMI has been below 50.
So, with the economic numbers pretty grim in Europe, the sovereign debt crisis is like the icing on the cake in terms of bad news. With the expectation for recession in Europe, it’s a bear market in European stocks and the prospects for the euro currency seem weak.
The problem with the current debt crisis is that the European banking industry has heavy exposure to individual country bonds and any default will put them in jeopardy. If the debt crisis were to get out of control, then there would be heavy pressure on the euro currency and many foresee an actual breakup of the world’s second largest reserve currency.
Predicting what will happen with the debt crisis and euro currency is virtually impossible. What the stock market wants to see is concrete, unified policy action from European leaders, and that’s been tough to get. Well-known investors like George Soros have given a decent probability that the euro currency will fail, but there seems to be a determined policy in Europe for these countries to stick together monetarily. One thing I know is that the debt crisis represents the single greatest risk to domestic stock market investors and, at the institutional level, Wall Street is getting fed up with the lack of solutions. As an individual market participant, I’m getting fed up, too.