With Greek Impasse, Europe's Debt Mess Is Just Beginning (Correct)

Story corrected to note that Hungary, while part of the European Union, does not use the euro currency.

BOSTON ( TheStreet) -- U.S. investors have been frustrated by Greece's debt crisis and its threat to undo the common currency pact. With a deal up in the air again, investors need to start questioning when the focus will fall on other European countries with similar problems.

After missing a Monday deadline, Greek leaders finally secured a deal on austerity measures that were supposed to lead to a bailout, the second in two years. In the latest set of frustrating developments, European finance ministers withheld approval of the rescue funds as the plan fell short of demands.

Even if Greece had secured the second bailout, it wouldn't be the end of the ordeal. Greece still has a debt-to-GDP ratio of 160%, which will get reduced to 120% only if creditors agree to a debt swap deal by Feb. 13 and accept new 30-year bonds. Meanwhile, Greece's unemployment rate still remains above 20%. So while debt may be coming down, GDP isn't growing and will likely be impacted by the austerity measures.

As part of the European Central Bank's working paper series, Roberto De Santis modeled the spread of the fever from Greece, Ireland and Portugal. "The estimated spillover effect from Greece and the impulse response functions points to severe contagion risk hitting particularly Ireland, Portugal, Italy, Spain, Belgium and France," De Santis concludes.

"You are being held hostage," Paul Nolte, managing director with Dearborn Partners in Chicago, says of investors in the current environment. "The problem is that they have papered over the problem. They haven't written down the debt."

The debt woes of Europe don't begin and end with Greece, either. Italy, Spain, and Portugal are members of the euro currency that are running up against unsustainable debt. In May, Portugal became the third eurozone country to receive a bailout, following Greece and Ireland. Italy, meanwhile, was forced to implement austerity measures in order to save billions. Even Hungary is facing problems with a mounting debt pile

"This is the blueprint for Portugal, Spain and Italy," Nolte says of a potential Greece deal, if one is agreed upon. "People around the world are cognizant of the fact that there are other countries in the same situation. Whatever we do for one, there will be someone next in line asking for the same."

Europe has taken a page out of the same book Federal Reserve Chairman Ben Bernanke used: Buy up the toxic assets and transfer the risks. Like Bernanke, his European counterparts don't want you focusing on their balance sheet. But unlike Bernanke, Europe is dealing with sovereign nations, not troubled banks.

"The response by central banks to any crisis is to print more money. They don't get to the root of the problem, which is solvency and writing down the debt," Nolte says. "Until they deal with the debt problem and the sovereignty problem, yes, it's kicking the can."

Other professional investors aren't as concerned about Greece defaulting, arguing that the country is a small blip and that European leaders know how to conquer other crises with lessons they've learned. Indeed, they're suffering from Greece exhaustion as many individual investors are.

"Greece is a distraction. Don't let it be," says Oliver Pursche, president of Gary Goldberg Financial Services. "Let's get it over with. Don't fall for the headlines. Don't let it distract you from the other important work that needs to be done, like fundamental research on companies."

The reality, Pursche says, is that Greece doesn't import or export that much, making it a small economy. Of course, there is exposure to the country's debt, but Pursche says that the country's inevitable default won't make too many waves.

"A default of Greece and its exit from the euro is inevitable. It will be orderly," Pursche says. "And the market is coming to the realization that even if there were a default, it wouldn't be nearly as dramatic and negative as was initially thought."

The bigger problem, though, is if other troubled nations go to the European Central Bank and International Monetary Fund, not with hat in hand but with pitchforks and torches demanding the same bailout considerations Greece has been offered. Pursche says those fears are overblown.

"Each day that goes by, that risk decreases," he says. "Because of the steps being taken by the ECB and the IMF, the same failures won't occur with Italy, Spain and some of the others. They are still risks, there's no question. But the reality is that the world failed to act in a timely fashion with Greece. That's why we're still talking about them."

Alan Gayle, senior investment strategist with RidgeWorth Investments, says European leaders "have done more to address their issues than the U.S. is doing to address its deficit issues."

"The Greek debt problem and economic problem will be the template for everything going forward," Gayle says. "It is evident from the depth of the recession that Greece is in, the bogey of how much money to bail them out is growing."

Gayle expects Europe to handle other sovereign debt problems better than it has Greece. He's impressed with the resolve by some of the leading decision makers, like Germany's Angela Merkel and France's Nicolas Sarkozy, in having a firm commitment to find a solution to keep the eurozone together.

So what do U.S. investors do? It all depends on how the situation plays out. Specific to Greece, Gary Goldberg's Pursche says the country's debt problem is a non-starter if you own U.S.-centric stocks like Verizon ( VZ) and AT&T ( T) or companies with big global operations, such as McDonald's ( MCD).

Pursche is also keeping his eye on financial stocks, which stand to benefit most as the crisis works itself out. He points out that the ECB is doing a virtually endless long-term repurchasing operation, or LTRO, which allows banks to borrow at 1% for three years.

Dearborn's Nolte, meanwhile, has found it hard to buy stocks because their values have risen too quickly. He says that's because the LTRO is essentially just like the U.S.'s quantitative easing. That has had big impacts for several asset classes.

"Emerging markets have been a beneficiary as the dollar has declined and commodities have picked up," Nolte says. "The more cyclical industrial names are doing well, just like when QE2 was announced. We still get the same result because they're injecting liquidity that has to find a home, which is usually the equity market."

One place where Nolte has found that valuations aren't getting too extended will come as a surprise to investors. Technology, which has been among the best-performing sectors this year, is one of the few places that Nolte says is really cheap. He points out three of his firm's top tech holdings that he says still are attractive: Cisco Systems ( CSCO), Apple ( AAPL) and Microsoft ( MSFT).

Nolte said his firm has also rotated away from utilities and consumer staples and health care. He's been looking at financial stocks, skewing toward the U.S. regional banks as opposed to the larger national banks. U.S. Bancorp ( USB) and BB&T Corp. ( BBT) have caught his eye.

Nolte's interest in tech and financials suggests he thinks this current stock rally isn't in true danger of falling apart, even if he doesn't agree with how European countries are using liquidity to address a solvency problem.

"It's a momentum type of market. By nature, those are always dangerous," Nolte says. "We're keeping an eye on the door. We see the rotation toward the risk-on type of names, which has been happening for only about two months. They may have another few months to run."

RidgeWorth's Gayle, meanwhile, is looking at the financial sector, which should see stability as the Europeans manage through the crisis and the market finally starts to recognize the progress being made.

"We've seen some basing in the financials," Gayle says. "If there's some resolution, that takes an enormous pressure off of the group. A lot of entities are already in the process of raising capital.

Gayle says he'd also start to look at some of the European businesses that have executed well even as they've been hit hard during the crisis.

"They're relatively cheap," Gayle says. "I also tell my clients that cheap is not a catalyst. It's just cheap. So if we get the improvement in the macro fundamentals and the market begins to recognize that, it would suggest we're moving to the other side. That would make us comfortable a world portfolio."

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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