Greece is toast--they just have not declared it officially burned. Portugal is so small it could be bought by a major US PE firm and just be another portfolio hold, although a poor investment. Ireland destroyed its banking system and will take many years to recover any semblance of its great growth years. Spain has well over 20% unemployment, but when you talk to Spaniards they say life is good, the restaurants are packed and we are all on unemployment and healthcare is all paid for so why worry. Italy has had more governments since WWII than anyone can count, and the current prime minister makes Bill Clinton and Monica look like a minor peccadillo. There is no way to know what shape the European banks are really in since they seem to have phony stress tests and nobody is really sure how bad the sovereign exposure is. Possibly France will be OK but who really knows for sure when Greece finally defaults.
So one wonders why so many US funds want to go to Europe to invest. It is clear there are assets for sale- you can buy almost anything in Greece for a deep discount-but is it worth the risk reward. There is no question the PIIGS are in deep trouble for years to come, and there are no good answers. The world economy and the US are not going to suddenly revive and pull Europe along as has occurred in the past. China needs to invest in Asia and Africa to secure its markets and raw materials, and to get geopolitical advantage now that the US is led by a weak president who has no idea how to cope with Chinese expansion. They are not going to be investing a lot in the Middle East either until that mess sorts out.
The European economies have many years to go to really potentially be vibrant again. It could easily be five years on the optimistic side, but more likely it could be as much as ten or even longer for Greece and some other smaller countries with nothing to really offer the modern digital and industrial world. The Euro is unlikely to survive this long term, and the banks will remain weak for many years as raising new capital will be very expensive for them for several years. Besides, who are they going to loan to. One of the big problems in many of these countries like Greece is they are so bureaucratic and in some cases corrupt, that even in good times it is daunting to invest in these places. Besides, Europe is not where the economic or population growth will be.
So back to the real issue. Why invest in Europe? Maybe it is like Japan once was, and it is so bad that there is only up from here, but it is my view that the problems are so deep, and the can is being kicked so far down the road, that the risk is not worth the game. You have to bet on Greece, the banking system, the Euro surviving, austerity not triggering major strikes and riots, the ability of government to actually collect taxes, and in some places, a complete culture change. Then there is the issue of will the dollar rise over the next several years in relation to the Euro and if so how bad might that be. It is far more likely that the US will revive more quickly, albeit slowly, and maybe we will get a real president in 2012. In 2012, or surely in 2013, the Fed has to raise rates. If the economy revives and the Fed raises rates, the dollar will rise vs the Euro and so you have real currency risk on top of all the rest of the issues.
To me the risk reward is simply not worth it. Better to be in the US or maybe a couple of Asian countries, or Brazil, and bet on slow but steady recovery and a stable government. The entire world is a mess right now and there is no magic bullet. Anything could happen, and likely the black swans will be dumping all over us for a long time to come. In such conditions it takes big brass to step out and make big bets. You might win, but much more likely you will lose.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
