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Why the markets are so unimpressed with today's Greek debt deal
02/21/2012 4:41 pm EST
The reaction to the new 130 billion Greek rescue package has been strikingly pessimistic—and surprisingly realistic. In the U.S. markets the Dow Industrials and the Standard & Poor’s 500 indexes closed up a piddling 0.12% and 0.07% today. In Europe the German DAX index closed down 0.58%, the French CAC down 0.21, and the Spanish Ibex down 0.58. In Asia Hong Kong’s Hang Seng closed up 0.25% and the Shanghai Composite was up 0.75% but I expect them to follow the U.S. and European lead tonight.
Because the markets are already billing this as the solution that solves nothing. The deal kicks a probable Greek default down the road a few months and investors fully expect to revisit exactly this crisis in May or June.
That wouldn’t be a problem for market indexes except that this deal comes after a rally in global financial markets that pretty much anticipated all the good news in the announcement—and more.
This morning the Financial Times published a 10-page debt sustainability assessment put together for EuroZone officials last week just hours after the deal was announced and while EuroZone finance ministers were still working out the details of the package. In effect that meant the deal came to the financial markets with a damning critique attached.
The report goes straight to the heart of the likely failure of the austerity strategy being imposed on Greece in exchange for 130 billion euros in rescue money. Austerity could cause the level of Greek debt to rise—as the size of the Greek economy shrinks. And that could require support from outside sources—the EuroZone countries, the International Monetary Fund, and the European Central Bank—well past the 2014 timetable envisioned in the current plant.
Under what the report called its “baseline” scenario, Greece would need about 170 billion in rescue, well above the 130 billion agreed today. Under what the report called its “tailored downside” scenario Greece would need 245 billion euros.
The report went on to cast doubt on the assumption in the current rescue package that Greece would return to economic growth in 2014 or that Greece will be able to return to the private debt markets to sell bonds by 2014 or 2015.
The best that anyone at a European investment house had to say about the deal today is that it would buy time to wind up Greece’s affairs in an orderly manner before the country goes into default later in 2012.
Those skeptics will be looking for action at the March 1 summit of European leaders that indicates that the EuroZone will actually use that time well. An addition to the firepower of the permanent European Stability Mechanism to 750 billion euros from 500 billion euros is reported to be on the preliminary agenda for that meeting. Bringing that to a vote—and actually passing it—would be the EuroZone’s first chance to show that it intends to put the time purchased by this deal to good use.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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