PhillyDeals: Europe, is this going to hurt?

Members of Greece's new caretaker cabinet place their hands on a Bible during a swearing in ceremony at the Presidential Palace in Athens on Thursday May 17, 2012. Greece is swearing in the caretaker cabinet that will lead the country into repeat elections next month, after a deadlocked vote sparked more political turmoil and brought the country's euro membership into question. The 16-member cabinet was being sworn in Thursday morning, to be followed by the swearing in of the 300-member Parliament who will take up their seats for a day before Parliament is dissolved for the new vote. The deputies were elected in May. (AP Photo)
Members of Greece's new caretaker cabinet place their hands on a Bible during a swearing in ceremony at the Presidential Palace in Athens on Thursday May 17, 2012. Greece is swearing in the caretaker cabinet that will lead the country into repeat elections next month, after a deadlocked vote sparked more political turmoil and brought the country's euro membership into question. The 16-member cabinet was being sworn in Thursday morning, to be followed by the swearing in of the 300-member Parliament who will take up their seats for a day before Parliament is dissolved for the new vote. The deputies were elected in May. (AP Photo)
Posted: May 20, 2012

Europe’s a puzzle. People over there stopped having babies — but they don’t like immigrants, either. Who do they think will staff their nursing homes?

Or pay for them? Seventeen European countries swore to stay on a budget if the rich Germans agreed to back a powerful united currency, the euro, so even Irish and Portuguese could afford German-built Mercedes sedans and Siemens gadgets and SAP software. But some of those countries lied!

Now they can’t agree to spend more, or less, to get things moving again. This spooks investors and slows down the world economy.

The Philadelphia area is home to pros who are so good at managing dollars that people send them billions to pick winners. I called some to try to figure out what’s going on across the Atlantic and how much we ought to worry.

Will it hurt us if the Greeks go broke? Depends on how much you lent them. … A while back, big U.S. pension funds owned piles of Greek bonds and debt from other nearly broke euro countries, such as Italy and Spain.

Just four years ago, the New Jersey Division of Investment, which finances checks for retired teachers and troopers and judges, still owned $2 billion worth of foreign bonds, much of it European, according to data that State Treasurer Timothy Walsh sent me. But not anymore; the state sold those securities after the 2008 credit freeze.

Pennsylvania still owns $20 million in Greek sovereign debt, says State Employees’ Retirement System spokeswoman Pamela Hile. But that’s just a dab of the fund’s $25 billion in assets. Mostly, euro debt “just hasn’t been attractive for several years, on a risk-adjusted basis.”

The larger Pennsylvania Public School Employees’ fund has also cut back on euro bonds. “Emerging” countries in Asia “have a better growth profile, which will allow them to service their debts,” spokeswoman Evelyn Tatkovski says.

But isn’t default contagious? As Americans and other savvy investors dumped European government bonds, patriotic banks in Greece, Spain and Italy bought them up — and resold them to the European Central Bank, says Oliver Boulind, whose team manages $11 billion in bonds from Scotland-based Aberdeen Asset Management’s Philadelphia office. So the central bank, and the big German and French banks that mostly support it, are on the hook. Sadly, they don’t have fat reserves, like American banks now do. So yes, this will hurt if it spreads — and America’s busy Fed isn’t likely to bail them out, especially in an election year.

So Aberdeen is light on euro-government bonds. But it still likes Europe-based companies: “Telecom Italia is a great company in a bad country,” Boulind says. “They own businesses outside Italy, like a great Brazilian cellphone operator. It’s a credit we like.” He’s also positive on U.S. municipal bonds — when carefully chosen.

Can European companies prosper even if their governments go broke? What is a European company, anymore? Or an American? Johnson & Johnson is based in New Jersey, but it has plenty of customers in Europe, and Asia, and will benefit or suffer with those economies, New Jersey’s Walsh noted.

Likewise, “we prefer to own industrial stocks with hard assets” and international customers, said Edward A. “Ned” Gray, chief investment officer at Philadelphia-based Delaware Investments’ $1 billion Global and International Value Equity portfolio. “Certain European companies,” BMW, for instance, ”are self-sufficient in terms of cash generation, they don’t need [to borrow] to keep their doors open,” making them resistant to local recession.

What next, if debtors walk away? Iceland and Argentina stiffed their creditors, and, after some pain, those nations are still in business. Greece’s popular left-wing parties want to try the same.

“Time heals a lot of wounds,” said Aberdeen’s Boulind. “Iceland defaulted three-four years ago. They were able to sell new debt a couple of weeks ago. They’re now rated investment-grade.

“If a new Greek government tries to implement some common sense solutions,” trimming freebies, actually collecting taxes, “the market tends to have a short memory,” he concluded.

Contact columnist Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.

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