No black-and-white solutions for Greece
July 6, 2012
In the wake of Greece’s national election, we on the Delaware Investments Fixed Income team are focusing on one key fact: once a new government is formed, the so-called “troika,” formed by the International Monetary Fund (IMF), the European Union (EU), and the European Central Bank (ECB), will return to Greece to reassess progress on the country’s previous bailout. It is very likely that Greece has fallen significantly behind on the targeted budget savings and reforms that were conditions of the bailout program. What’s more, the new Greek government will almost certainly demand significant easing or renegotiation of the conditions. There have been conciliatory tones coming from the EU, but Germany has maintained a tough stance.
It has been reported that the Greek government will run out of cash by mid-July if the next troika payment is withheld (source: Bloomberg). Thus, there is intense focus on the timelines. Furthermore, it has not gone unnoticed that the New Democracy party was in charge as the Greek government ran up huge deficits, and the party’s subsequent ousting in 2010 revealed that it was hiding serious budget problems from the EU.
The economics facing Greece are horrendous, but the country’s commitment to reforms has been poor, and this lack of effort is making it difficult for the troika to simply give in to Greece’s demands. That said, international leaders are likely to continue putting pressure on Europe to find a more sustainable solution that involves a serious self-help component on Greece’s part.
A few words about Spain — another country that investors are growing increasingly worried about
Recent data show that Spain’s banks are wrestling with a nonperforming loans ratio that reached 8.72% in April (up from 8.37% in March) (source: Bloomberg). If the capital injection sought by Spanish banking officials in early June is not large enough that Spanish banks can withstand the collapse in the country’s domestic property market, there may be severe market impact, as the market may question the country’s solvency. The bank recapitalization money will be reflected on Spain’s national balance sheet, and with its economy in a deepening recession, the weight of the burden will continue to increase. And just like Greece, Ireland, and Portugal, Spain could eventually need outside help.
We believe the coming months will continue bringing uncertainty and a heightened probability of volatility throughout financial markets. Whatever risk factors come to the forefront, we will remain dedicated to our investment process, grounded in a view that managing risk is just as important as pursuing returns.
Across the funds we manage, we are maintaining overweight allocations to the corporate debt sector, but we remain mindful of European exposures. The funds currently hold what we consider to be high-quality sovereign investments and emerging market debt (sovereign as well as corporate issues). Within the multisector portfolios we oversee, we are currently maintaining tail-risk hedges, as a defensive measure in case various policy measures prove inadequate. We have sought to limit interest rate sensitivity within the portfolios at this stage, because we believe interest rates should stay low far longer than predicted by many sources within the investment community.
The views expressed represent the Manager's assessment of the market environment as of July 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's current views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting the fund literature page or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
Fixed income securities can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder a issuer’s ability to make interest and principal payments on its debt.
High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.
Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security may be prepaid prior to maturity, potentially forcing an investor to reinvest that money at a lower interest rate.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.
Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
International fixed income investments are subject to currency risk. Adverse changes in foreign currency exchange rates may reduce or eliminate any gains provided by investments that are denominated in foreign currencies and may increase losses.
If and when the Portfolio invests in forward foreign currency contracts or use other investments to hedge against currency risks, the Portfolio will be subject to special risks, including counterparty risk.
“Nondiversified” funds may allocate more of their net assets to investments in single securities than “diversified” funds. Resulting adverse effects may subject these funds to greater risks and volatility.
Investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligations to update any forward-looking statements to reflect events or circumstances that occur after the date of this document.