David Rosenberg, chief economist and strategist at Gluskin Sheff, pulls out some numbers that put the European debt crisis into perspective. From his latest missive to clients:
"The bottom line is that even if the fiscally-challenged countries of Europe do not end up defaulting, or leaving the Union, the reality is that they will have to take draconian measures to meet their financial obligations. Devaluation was the answer in the past in Greece but it cannot rely on that quick fix this time around without leaving EMU and if it did, then that could make it even harder to service its Euro-denominated debts - at least not without a restructuring.
"And, if Greece did attempt at a debt restructuring, rest assured that Italy, Spain, Portugal and Ireland would be next - we are talking about a combined $2-trillion of potential sovereign debt restructuring that would more than triple the $600-billion direct cost of the Lehman bankruptcy."
Mr. Rosenberg isn't just pointing out why investors are right to be a little worried, though. He also addressed the rising U.S. dollar, which recently hit seven-month high on a trade-weighted basis. He remains bearish on the dollar and bullish on commodities longer-term, but this "countertrend rally in the greenback" - as he calls it - has some interesting precedents.
He noted that since the start of the credit crisis in 2007, there have been three previous occasions when risk aversion sent investors frantically grabbing at U.S. dollars: July 15, 2008 to Sept. 11 2008 (due to concerns about Fannie Mae and Freddie Mac); Sept. 22, 2008 to Nov. 21, 2008 (post-Lehman financial collapse) and from Dec. 17, 2008 to March 5, 2009 (the final leg down in the financials).
It is still too early to know whether the current concerns out of Europe are about to make this a fourth bout of risk aversion, but here is what happened during those previous bouts:
1. The U.S. dollar index rose an average of 12.3 per cent.
2. The Canadian dollar fell an average of 11 per cent against the U.S. dollar.
3. The S&P 500 fell an average of 18.5 per cent. Materials, energy, industrials and financials performed worse than the average. Defensive utilities, staples, health care, tech and telecom performed better. (In Canada, only energy and materials were big drags on the S&P/TSX composite index, though all sectors fell.)
4. The price of crude oil fell on average, fell 26 per cent, while gold fell an average of 11 per cent.