Morgan Stanley advises investors to unload risky investments because problems in Greece are likely to persist and possibly spread, creating a double dip recession.
“We recommend selling risky assets into strength over the near term,” the company said in a note to investors.
“The road to repair will be a long, painful journey buffeted by tremendous uncertainty — not typically a great environment for risk-taking.”
The medium-to-longer term issue for the markets is not whether troubled sovereigns get the help they need, the bank says, but whether the aid and the accompanying necessary fiscal retrenchment leads to an economic slowdown or double dip for the developed world.
Credit default swap “spreads on Greek sovereign debt, yield-curve steepness, and earnings expectations implicit in equities are all too sanguine given the severity of the crisis,” the bank observes.
“The market is underestimating the tough domestic fiscal reform needed, without which ECB liquidity support is unlikely to be forthcoming. And because of the close interrelationships between the European banking system and sovereign credit, the contagion effects are much greater than the market perceives.”
European finance ministers meeting in Brussels on Tuesday refused to specify potential aid measures for Greece and increased pressure on the country to rein in deficits, the Associated Press reports.
After leaders recently promised to back Greece, EU governments are looking for guarantees that it can slash spending before they spell out what help they may offer.
However, Greek Finance Minister George Papaconstantinou resisted calls for deeper spending cuts and said that the government was "ahead of the target" set out in its deficit-reduction plan.
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