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The Dog That Did Not Bark

Something pretty significant did not happen yesterday, and because it did not happen, not many people paid attention to it. But it is pretty significant nonetheless.

Greece did not default on a public debt of €8 billion that came due yesterday. It had the cash to pay its creditors on time, courtesy of the massive rescue package that its fellow members of the euro zone made available earlier this month.

Global financial markets have been slumping since mid-April, with the euro’s value in free fall. Europe has gotten most of the attention because of the debt crisis in Greece that was beginning to spread to Portugal and Spain before the rescue package was established. That rescue package produced only a brief rally before new worries set in, mainly over whether government budget cuts in Europe would set back the global economy.

Just a few weeks ago, the markets were worried that Europe would not find the political will to make the budget cuts that now are so worrisome. Sometimes, you just can’t win. It is at just those times that I find it pays to focus on fundamentals, and those fundamentals are getting better.

Most fundamentally of all, Greece did not default. It is not going to default, at least not any time soon. The rest of Europe, backed by the International Monetary Fund and, indirectly, by the U.S. and other major economies, is making sure of that. Any eventual default will most likely not be allowed to bring down any systemically important financial institutions, meaning there will be no repeat of the Lehman debacle of 2008. And the budget austerity that is likely to depress European economies in the short term is exactly what the continent needs to get its fiscal house in order for the long term.

Much more is needed, such as the French government’s newly announced plan to make public employee retirement benefits less generous. But at least this year’s encounter with the fiscal abyss has made European governments, from Greece to Portugal to non-euro-member Britain, serious about reform. That’s more than we can say about our own policy makers.

I think a number of other factors are also contributing to the foul mood in the markets. It has simply been a lousy spring on a lot of fronts. Volcanic ash has repeatedly snarled Europe’s air traffic and cost the airlines billions. The uncontrolled oil spill in the Gulf of Mexico is bad news for all the big energy companies, which must look offshore for new supplies, and the spill happened at a time when economic worries were already driving down oil prices. China has repeatedly moved to slow down its fast-moving economy for fear of hitting a financial wall.

Not least of all, governments in the United States and around the world continue to demonize banks and other financial market players for, in many cases, just being financial market players. Since April we have seen the U.S. government smack Goldman Sachs with a Securities and Exchange Commission civil lawsuit, a congressional kangaroo court and a widely reported criminal investigation, all on what seem to be shaky grounds. Abroad, European leaders continue to accuse investors of being predators (or worse) because they have the temerity to question the soundness of their investments in those same leaders’ fiscal promises. Germany abruptly imposed some restrictions on short-selling this week.

So it is not surprising that the markets, which had rallied since last year in anticipation of at least a moderate economic recovery, are confused about whether things are likely to get better or worse as we go forward.

The fundamentals are telling us that things are going to keep getting better.

Remember, Greece did not default. Consumer demand, industrial production and even employment here in the United States are on the upswing. The drop in the euro’s value will itself be a kind of economic stimulus for some of the worst-hit Mediterranean countries, as North American and Asian tourists will find it cheaper to vacation in the Greek isles or Italian piazzas.

Eventually that oil spill in the Gulf will be stopped, and the mess will be measured and cleaned up or at least contained. Goldman Sachs and other institutions will resolve their regulatory issues, and the end of the American election season will diminish the political payoff for bank-bashing. It strikes me that by the end of 2010 spirits are likely to be brighter than they are now.

Might there be other nasty surprises out there? Undoubtedly. But the self-adjusting systems of the financial world seem to be in working order, and it looks like we can deal with whatever the next couple of years have in store. Beyond that, a lot depends on whether America can start getting its act together before walking to the edge of a cliff as Europe did.

But yesterday, nothing much happened, and that’s good news.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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