Greece has chosen the path to default! Specifically, Greek
officials called for a nationwide referendum on July 5 over the European
bailout program rather than reach a direct agreement with creditors over the
weekend.
Next, Greece itself said it will skip a 1.7 billion euro
debt payment due tomorrow to the International Monetary Fund (IMF). That, in
turn, is a default in everything but technical name only. It also means
Greece’s current bailout program will expire with nothing to replace it.
The European Central Bank (ECB) responded to the referendum
news by refusing to hike its emergency aid to the Greek banking system,
currently around 89 billion euros after several recent increases. Since those
funds were the only thing keeping Greek banks alive, the Greek government was
forced to shut down all the nation’s banks through at least July 6.
Will Europe be seeing the return of the drachma? Greek citizens
can still take money out of an ATM, but only 60 euros per day. The Greek stock
market was also shut.
Those moves temporarily halt the worst of the financial
bleeding in Greece. But they also open up a whole host of other questions.
The most pressing one for depositors: What the heck will
they get back the next time a teller window is open to them? Euros? New
drachmas? IOUs? And the bigger question for investors around the world is:
“Does this mean Greece is going to get kicked out of the euro currency union?
If Greek citizens vote “No” to Europe’s last and best offer
on the table this coming Sunday, I believe Greece will get kicked out. If they
vote “Yes,” there’s always a possibility the country hangs on by its
fingernails for a while.
But without permanent debt relief that acknowledges it can
never pay back all its bonds at face value, Greece might be forced to abandon
the euro and introduce its own currency anyway. It sure seems like Germany,
France, and other European nations – which hold all the financial cards here —
are fed up and ready to cut the country loose.
Greek Prime Minister Alexis Tsipras tried to put a brave
face on the situation. He tried to rally his political base behind a “No” vote,
couching it in terms like this: “The dignity of the Greek people in the face of
blackmail and injustice will send a message of hope and pride to all of
Europe.”
But the initial reaction in global markets was swift and
severe. Asian markets tanked, while stock markets around Europe plunged as much
as 5%.
Bonds issued by peripheral European countries fell in value,
while the euro currency dropped below 1.10 against the dollar, before bouncing
a bit. Anyone unlucky or unwise enough to own the handful of direct Greek
investments that trade here in the U.S., such as the Global X FTSE Greece 20
ETF (GREK) or National Bank of Greece (NBG), lost even more of their money. NBG
plunged 24%, while GREK lost 20%.
Now, we’ll see where the rubber meets the road. I laid out
my three possible scenarios for what would happen in Greece, and how that would
impact investors like you, two weeks ago.
We clearly did not get Scenario #2 (a last-minute can kick
deal). That leaves Scenario #1 (a quick and painful, but ultimately healthy
move) and Scenario #3 (a long, drawn-out disaster scenario).
I suggested #1 was the most likely all along. But the truth
is, the markets are going to determine the ultimate answer. My three “tells” to
see which is getting the upper hand? The euro currency, the European bond
market, and U.S. financial stocks.
“There’s pressure on all of them … but none of the
out-of-control panic of 2007-09.”
If the euro tanks and other peripheral European bond markets
start following Greece’s into the abyss, that would be a huge red flag. And if
U.S. financial stocks start plunging, that would be a sign that contagion fears
were spreading beyond Greece’s (and Europe’s) borders.
So far, there’s pressure on all of them — with the Dow
dropping by around 350 points today … but none of the out-of-control panic
we saw during the credit crisis days back in 2007-09. That could easily change,
though, and you can bet I’m watching closely. So stay tuned for more
recommendations and commentaries about what to do next – right here at Money
and Markets and in your other subscription services.
What about you? Do you think Greece was wise or foolish to
launch a referendum? Will the result matter, or is Greece doomed to get kicked
out of the euro regardless? What immediate and/or lasting effects do you
foresee for U.S. stocks and bonds?
Are you making any moves in your personal portfolio in light
of the latest news? Here’s the link to the website where you can share
your thoughts. I definitely want to hear from you in these turbulent times.
Other Developments of the Day
While Greece is grabbing all the headlines, China is
experiencing more turmoil of its own. The benchmark stock markets there have
now plunged more than 20% from recent highs, putting them “officially” in bear
market territory.
The Chinese central bank responded by cutting interest rates
a quarter point, and by easing bank reserve requirements. But it didn’t do much
to stem the selling over there, nor to ease analyst concerns about China’s
economy.
While we’re at it, Puerto Rico is in lousy financial shape
too. The government admitted there is no way it can pay back its $70 billion in
debt, and that it will need to default on and restructure its bonds and loans.
Billions of those bonds are sprinkled throughout municipal bond funds and the
accounts of individual investors attracted by the U.S. commonwealth’s high muni
yields. So losses tied to the restructurings will ripple through the debt
markets in coming days and weeks.
General Electric (GE) continued its international garage
sale of assets, selling fleet financing and management businesses to Element
Financial for $6.9 billion. The deal covers fleet financing operations in the
U.S., Mexico, Australia, and New Zealand, and it’s part of a plan to jettison
$100 billion in businesses this year alone.
Until next time, Mike Larson
Mike
Larson graduated from Boston University with a B.S. degree in Journalism and a
B.A. degree in English in 1998, and went to work for Bankrate.com. There, he
learned the mortgage and interest rates markets inside and out. Mike then
joined Weiss Research in 2001.
Source:Money and Markets
Market RoundupDow-350.33 to 17,596.35S&P-43.84 to
2,057.65NASDAQ-122.04 to 4,958.4710-YR Yield-0.145 to 2.331%Gold+$5.50 to
$1,178.70Oil-$1.47 to $58.17
No comments:
Post a Comment