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It’s all Greek to most of us
by Peter Switzer
Over the last week, we learnt that the Greeks were given the unenviable tag of the worst-rated country in the world when it comes to their debt.
To recap in case you missed it, Greece was downgraded by credit ratings agency Standard & Poor’s to the lowest rating in the world! It’s now at CCC but D lies ahead if it defaults. The chances of a default are increasing but the Greek government and the experts argue the EU and the IMF will come to their rescue.
More worrying, private bondholders might be forced to take some losses, which would unsettle markets. Now this will hit the balance sheets of European banks and this is why financial institutions are copping it as well.
In the worst-case scenario, the Greeks would default and short-sellers and hedge funds would take it as a perfect opportunity to exploit the fear in the market. Uncertainty would prevail in global markets until we see how the EU, the European Central Bank and the IMF collectively respond.
The trigger for the big sell-off on Wall Street, which saw the S&P 500 slide a whopping 1.74 per cent, was rioting in the streets of Greece. On top of that, Reuters reported that the country’s Prime Minister, George Papandreou, offered to vacate his position to join with the conservative opposition to create a national unity government.
To make sense of the street riots, the latest reading on unemployment in Greece is 16.2 per cent and much of this has come out of the Greek government invoking an austerity program to appease their EU buddies who are bankrolling their former profligate ways and mountain of increasingly dodgy-looking debt.
CNBC’s Patti Domm pondered the question – could Greece become the next Lehman Brothers, which triggered the massive falls in stocks in the second-half of 2008?
Byron Wien, vice chairman of Blackstone Advisory Partners thinks the world has learnt the ‘too-big-to-fail lesson’ and worldwide wisdom would prevail. He makes two worthwhile points.
“In retrospect, a lot of people think something should have been figured out so Lehman didn't have to go bankrupt,” he underlined. “The second thing is Lehman went under, but no bank went under.”
Already Moody’s has explained that Greece could lower the ratings on France’s three biggest banks – BNP Paribas, Crédit Agricole and Société Générale – which have exposure to the country.
The interdependence of the global economy again is underlined and explains why the EU and the IMF have to act hand in glove to solve this Greek tragedy.
Incidentally, this puts the unfortunate timing of the IMF boss, Dominique Strauss-Kahn’s alleged indiscretion into its serious context. At a time when Europe needs financial leadership, it doesn’t help that the appointed leader is facing a hefty jail sentence for behaviour unbecoming.
So as the protests in the streets of Athens unsettle world stock markets, the negotiations of the key players trying to prevent a Greek default that could rattle European banks, which in turn could create another credit freeze, will continue in the corridors of political and banking power.
By the way, there’s another concern – contagion! The fear would be if the EU and IMF can’t prevent a Greek default, then the question would be posed: “Who’s next?”
This would put the state of the PIIGS – Portugal, Ireland, Italy, Greece and Spain into sharp focus. And this could affect more banks and really rattle stock markets along with other traded products.
Let’s just look at how these markets responded to the Greek-created sell off on Wednesday on Wall Street.
The VIX, which is called the fear index, was up around 17 per cent to a level of 21, which shows the spook factor is coming back to the stock market.
Not surprisingly the euro lost about two per cent and the greenback resumed its safe haven status.
The Oz dollar lost around two cents to 105.63 US cents and what about oil – US light sweet crude slid over four bucks to US$94.81 a barrel.
Commodity prices also dived and the likes of BHP Billiton and Rio Tinto lost over three per cent on the international markets.
Not surprisingly financial stocks were hammered as they potentially are at the epicentre of a possible market crash. However, I emphasise the word ‘possible’ but it does underline the seriousness of the Greek debt disaster.
By the way, this Greek matter happens when the number of fear-inducing issues are as long as a US basketballer’s arm. There’s the US slowdown, the US deficit-debt ceiling stoush in Congress, the Libyan war, the protest in the likes of Syria as well as Yemen and the Japanese drama, which still affects its economy along with others such as the USA.
And don’t forget that at the end of this month, the US economy will have to learn to grow without the benefit of the monetary stimulation from QE2.
Hopefully by now, why the stock market is sinking fast should no longer be all Greek to you.
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.
Published on: Monday, June 20, 2011
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