I've been working under the assumption that the powers-that-be in Europe (the EU, ECB, the IMF, and the heads of the various PIGI states) would find a way to eventually "handle" the situation in Greece. Note that I did not say "fix" the situation in Greece, or Portugal, or Spain, or Ireland. No, I have merely been expecting the guys and gals in charge to find a way to avoid a "credit event" that, if not dealt with correctly, could threaten the global banking system all over again.
Given the amount of time that the leaders of the world have had to work on this issue, I've assumed that they would figure out some way to make everyone (meaning the Germans) happy enough to kick this ugly can down the road - at least far enough to give the world some breathing room. However, with riots in the streets of Greece and the politicians now getting involved, I am becoming more than a little concerned that the politicos might muck this thing up. And in short, THIS is what Wednesday's dance to the downside in the stock market was all about.
Sure, there are some not-so minor details to work out, not the least of which is the fact that the rating agencies consider any change in the existing bonds to be a default. Yes, EVEN if the changes are voluntary. Remember, unless the new bonds being offered to the folks holding Greek debt are actually better than the old ones, Fitch says it's technically a default if somebody chooses to switch. And while there are surely some legal loopholes to play with (which have been a big part of my assumption that things would work out), the key is that any changes, restructuring, reprofiling, etc. must be done right.
There are also plenty of political angles that are likely to play out in this mess. Like the conservatives in Greece suddenly announcing that they are going to demand a renegotiation of the bailout terms. (Huh? Are you kidding me? Which part of "you guys are bankrupt" are you having trouble with?) But again, given what is at stake for the state of the global economy, I REALLY thought this would take care of itself - even if it did take a while and got a little messy in the process.
But with the Germans bickering amongst themselves, the Greeks deciding to toss out the government and the public not-so quietly suggesting that they want no part of this austerity thing, the Irish saying they want the bondholders to pay too, the IMF's little distraction with hotel maids, and the ECB's public pronouncement that it won't stand for any restructuring, reprofiling, etc, I think the markets might be starting to worry about these guys doing the unthinkable - as in mucking this bailout up.
So, until traders can be convinced that this bailout of Greece is actually going to go through, the stock market is likely to remain a volatile place to invest. In case you haven't notice, the Euro/dollar/stock correlation trade is back "on" with a vengeance right now. And as such, we'd best keep one eye on the Euro at all times during trading hours.
Looking ahead, once the powers-that-be DO actually ride in on their white horses and save the day, it is a safe bet that stocks will rally ferociously. And THEN traders can return their attention to the state of the U.S. economy. And on that note, if the data doesn't start improving, we might be in for a very long summer.
Source: Top Stock Portfolios
