‘Greece Fatigue’: Market Hopes Bailout Plan Will Work
Now that Greece has some semblance of a default plan in place, investors might be able to start concentrating again on other financial market influences.
News that the troubled Club Med outpost had put together a deal with the vaunted Troika appeared to give a lift to the already-surging U.S. stock market, which pushed past the psychological 13,000 barrier in intraday trading for the first time in four years.
Or maybe it was continued enthusiasm about the mild economic recovery, or the improvement in earnings.
In any event, markets began to provide indication that the financial world may not revolve around Greece, at least for a little while.
"There is a lot of Greece fatigue," says Kim Rupert, managing director of global fixed income analysis for Action Economics in San Francisco. "We're really tired of this news story and the headlines. But it's not out of the picture."
While many traders parsed 2011 action in the either-or function of risk-on or risk-off, they may as well have been talking about Greece-on or Greece-off. If it looked as though the Troika — the European Central Bank, International Monetary Fund and the European Commission — had developed yet another rescue plan, markets were up. If it looked like Greece was ready to fail and bring the rest of the developed world with it, markets fell.
With a plan that at least stops the bleeding for a while, hopes are that the market can get back to its normal worries of war in the Mideast, the political turmoil in Washington, and the precarious state of the economic rebound.
"No matter what happens I think that all Greece events are priced into the markets," says Peter J. Tanous, president of Lepercq Lynx Investment Advisory in Washington, D.C. "No 'unknown unknowns' here. The U.S. market will continue to be primarily influenced by the economic recovery."*
Like many others, he sees a full Greece default and exit from the euro zone as inevitable. Until then, though...
"Greece still matters," says Athanasios Vamvakidis, forex strategist at Bank of America Merrill Lynch.
Vamvakidis maps out several scenarios in which investors, while seeking to move past the sovereign debt crisis for the time being, will have to revisit things in the future.
"Greek euro exit could have systemic implications for the eurozone," he writes in a research note. "The eurozone could be stronger without its weakest link, which is Greece in our view, but breaking of the eurozone’s weakest link still poses substantial risks."
In particular, if Greece exits and renews the drachma it could lead to "a bank run, uncontrollable inflation, and potentially severe social unrest."
"Allowing such a scenario to unfold in Greece while the rest of the region is still in the beginning of their reform process could jeopardize their chances of success and trigger renewed funding pressures, as a euro exit becomes possible."
Ultimately, as Vamvakidis sees it, this could be just the latest in a series of last chances for Greece to get its act together.
"In this contest, we expect the Troika to try to give Greece one more chance with a new program, although whether they will succeed is more uncertain than ever," he says. "If the rest of the region has enough time to adjust, an eventual failure of the new Greek program may not have broader market implications. In the meantime, however, we expect markets to continue being concerned about a disorderly Greek default, with negative EUR [euro] implications."
Indeed, the early verdict closer to the Greek mainland wasn't so good.
European equity marketsfell modestly, while Greek stocks specifically dropped more than 5 percent.
Bob Janjuah, the longtime bearish fixed income analyst at Nomura Securities, says he has lumped Greece into the "self-serving political debacle" file, with the possibility that central bank intervention will keep financial markets afloat well into the future, but with dire long-run circumstances.
"Depending on how long we can continue to kick the can down the road in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decreasing debt sustainability," Janjuah says.
Interestingly, Janjuah has a Standard & Poor's 500 target as low as 800 or even 700 in a worst-case scenario, but says the index could zoom higher first, perhaps even to the "high 1500s."
And Charles Biderman, CEO at the TrimTabs market research firm, says he expects this supposed Greek solution to meet with a similar fate as the others.
"Amid the good news on the emerging-markets front, we can’t ignore the simmering troubles in Greece, where a settlement on austerity measures appears unlikely to be of much help to the stock market, if past rescue measures are any guide," he writes.
"Going back to 2010, each major attempt to bail out Greece has been followed by significant declines in stock prices, and with the markets in the midst of a three-month rally, it seems likely that investors will cash in their profits."
*(Major disclosure: Peter and I co-authored Debt, Deficits and the Demise of the American Economy (Wiley, 2011) that correctly foresaw the Greek default and the ensuing ramifications it will have across Europe and, ultimately, the U.S.)
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