I had the opportunity to hear two great investors speak last week.
Marc Lasry, CEO of Avenue Capital Management, and Bruce Richards, CEO of Marathon Asset Management, spoke at an event which I attended. Both men run hedge funds with more than $10 billion of assets under management. Their hedge funds have grown due to their savvy investments in distressed assets.
Lasry and Richards are both investing in Europe now and had a lot of thoughts on the topic. In this era of non-stop media it is useful to hear ideas from two successful and great thinkers.
Lasry and Richards thought that despite the moral hazards of bailing out Greece, it had to be done. The strongman of Europe, Germany, would have to bear the burden of the costs. Despite Greece being a relatively small economy, there is a huge risk of contagion.
If Greece defaults the bond vigilantes will exert tremendous pressure on Spain, Italy and Portugal, which make up 27 percent of the eurozone’s GDP.
It is better to bear the costs now instead of delaying and waiting until the problems get worse. If Europe had done this earlier, the price tag would likely be a lot lower.
Germany and others decided to kick the can down the road and everyone is now facing a much worse problem as a result.
A bailout of Greece is deeply unpopular in Germany. As Lasry stated “the Germans don’t want to pay so that the Greeks won’t have to work.”
Beyond Greece there are other problems with European banks. A few months ago, Europe did a stress test on European banks that basically stated everything was fine. Now people are seriously questioning this, especially as Belgium was forced to bailout a mega-bank, Dexia a few days ago.
The two hedge fund giants think that the stress tests from this past July, which showed European banks needed an extra $2.5 billion of capital, were off to say the least. Lasry and Richards stated that European banks will have to recapitalize European banks on the scale of $500 billion to $1 trillion dollars.
The banks are no longer able to raise capital in the stock market. Due to their large share declines, banks cannot raise money by issuing shares.
Additionally investors are frightened of buying bank debt due to all the problems that the banks are currently facing.
Germany and France will have to provide the money to strengthen the banks’ balance sheets. While this will be political unpopular and very expensive, the alternative could be financial Armageddon.
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