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Greeks are a bit of a worry

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by Peter Switzer

It’s an oldie but a goodie and it’s timely to remind everyone: “Beware Greeks bearing gifts”.

Considering the worrying Greek debt news around at the moment (which went from bad to terrible with talk about a referendum on austerity measures which the Greeks would say no to), Wall Street still ended positively.

And the VIX or fear index reinforces my contention that this year is different from last year because more investors believe the “we will muddle through this” thesis.

News overnight

For the record, the Dow ended up just over 38 points to 12,394.66 while the S&P 500 put on a tick over four points to finish at 1320.47. That’s up 0.32 per cent.

Sure the Yanks got some good news on oil supplies within America but what we’re seeing is a real reluctance to cut positions in the market and run.

However, I suspect the sell-off phase isn’t over yet. Greek debt worries will ensure there are plenty of opportunities for short-sellers and hedge funds to test how far this market will go down.

In Europe, the Greek Prime Minister’s office denied the prospect of a snap election in the country in a CNBC interview. Greece has been forced to step up austerity efforts and the Greek people are increasingly angry about the spending cuts they face.

Interestingly, there was a 3.6 per cent fall in durable goods orders in April but there’s also a recognition that the Japanese earthquake and related dramas will hit US economic growth, so a lot of this softer economic data isn’t a negative for the market as many might expect.

Big question

The big question is — how worried should we be about Greece?

I have argued that the scary bit about a Greek default would be how it affects the banks’ balance sheets, which have lent to Greece. Also there are insurance companies, central banks and pension funds which hold the debt.

Remember when Lehman Brothers failed it lead to a credit crunch where banks did not want to lend to each other.

So the management of this has to be an A-grade effort.

CNBC points out that “in the US, only three percent of government debt is held by banks". But in Europe it’s closer to 30 per cent!

Smarter decisions?

Furthermore, it’s not clear which banks are dangerously exposed to Greek debt and that could create the bank mistrust of other banks that led to the credit crisis before the GFC.

That said, there’s such a vested interest for governments, the EU and financial institutions to manage this sensibly. Unlike the Lehman Brothers episode, I suspect there will be smarter decisions made. Well, I hope so.

I guess it’s a bit inconvenient that the IMF boss, who should be leading the management of this Greek debt disaster, faces a disaster of his own in the US as an alleged rapist of a hotel maid!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, May 26, 2011

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