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.
There’s a lot going on in the world, and I’m sure you’ll have plenty to say about that in the days ahead. But on Friday and over the weekend, a lot of the discussion at the website concerned Obamacare.
Reader Allan K. said the following in response to a previous comment about how we’re better off with the Supreme Court fending off the latest Obamacare challenge:
“Remember, the job of SCOTUS is not to make law but rather to ‘establish’ Constitutionality. Many are cheering; many are not. Regarding ‘better off’, ask those folks who were told they could keep their policies and their doctors … and those folks who are now paying much more for much less coverage … and those folks who have a new tax. Like much in life, our opinions are jaded by which end of the telescope we’re using.”
Reader Donald M. added: “The insurance companies are infinitely smarter and more experienced than the academic egg-heads and political hacks who gave us Obamacare. The insurance companies will play along only as long as it is in their collective best interests.
“When Obamacare collapses under its own weight, the insurance companies will have Plan B ready to go. Ideally, the Republicans will be wise enough to pass enabling legislation that will result in a truly equitable health insurance program incorporating nationwide free market competition and tort free/loser pays attorney control.”
Reader Richard P. added: “Obamacare has always been the wrong solution. It is costly and inefficient. What is needed (and adopted by every first world country but us) is a ‘single payer’ or ‘Medicare for all’ plan which cuts out the insurance companies from the cost equation, reduces paper work, etc. and is far better and cheaper than our mish mash mess with or without Obamacare.”
Finally, Reader Richard said Obamacare might not help the hospital operators as much as some think. His rationale:
“I question whether the Supreme Court ruling will lead to more medical care being provided to more patients. Any increased access to care by the poor will be offset by less care being sought by those with insurance as the deductibles, often in excess of $5,000, and copays which will increase, will make healthcare unaffordable for the middle class that works and has insurance.
“They will only seek care when they are seriously ill, as the real cost of care will continue to go up dramatically. This is a fools’ game perpetrated by politicians who don’t have to deal with the cost of the healthcare they have forced on their constituents because their Cadillac plan is being paid for by us, the taxpayers.”
Thanks for weighing in. I’ve written about many of the twists and turns in the Obamacare debate over the past several quarters. It’s clear that many of you question the program and its impact on your financial lives, even as some support its broader goals. But given the latest Supreme Court ruling, it is the law of the land for now – meaning we all will have to cope with that reality one way or the other.
Any thoughts I didn’t cover? Then don’t keep them bottled up – share them with your fellow investors at the website.
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.
* The second escaped convict from a New York prison was shot and arrested yesterday, ending the massive manhunt that had been underway for most of June. David Sweat is said to be in critical condition, while his accomplice Richard Matt was shot and killed two days earlier.
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.
What are your thoughts about the financial problems in China and Puerto Rico? The slimming down at GE? Other stories I haven’t covered here? Let me know over at the website when you have a chance.
Until next time,