The market lost its rose colored glasses today with Greece
announcing a political referendum early in 2012 on the recent EU
bailout deal. This could lead to the deal falling apart sooner
rather than later. Stocks sold off on the news in Europe and the
U.S. while interest rates rose in Greece and other troubled EU
The deal that the EU put together last week to handle its debt
ridden members and to help prop up its banks was essentially smoke
and mirrors surrounding a house of cards. It had no chance to work
in the long run and the best it could accomplish was to buy more
time before the inevitable day of reckoning. The 50% haircut on
Greek debt, plus $130 billion euros did provide Greece with enough
funds to keep going. It did not stabilize the situation enough
however to ensure another debt crisis wouldn't occur within the
next few years. Nor was there any reason to believe that Italy,
Spain, Portugal and Ireland wouldn't need a similar bailout in the
future. The plans for recapitalizing EU banks were likely to create
a credit crunch and send the EU into a deep recession before
further steps were taken. The centerpiece of all the bailout
operations the EFSF (European Financial Stability Facility) was
based on essentially printed money that was going to be leveraged.
This was how the problem of too much debt was going to be solved.
While stock markets worldwide had huge rallies based on the 'good'
news that came out of the EU last week (traders like hearing about
governments printing more money), they were giving back those gains
on Tuesday. Both the German DAX and French CAC-40 were down over 4%
in late day trading. The euro, which has held up remarkably well
during the entire crisis was down over 1%. Big EU banks were
getting slammed hard. France's Socit Gnrale (FR:GLE) was down
almost 17%, Credit Agricole (FR:ACA) fell almost 13% and BNP
Paribas (FR:BNP) dropped almost 12% . Deutsche Bank (
) was down over 6% and Commerzbank (DE:CBK) down over 10%. The U.S.
S&P 500 was lower by a comparatively mild 2% in early
Bonds reacted more strongly. The yield on the safe haven 10-year
U.S. treasury fell over 6% and the yield was barely above 2% in the
morning in New York. Yields on trouble country debt in the EU were
moving in the opposite direction. Italian 10-year governments
traded over 6.25% (above 6% is considered a critical point of
potential breakdown). Only buying from the ECB, which also included
Spanish government debt, kept yields from soaring much higher.
Yields in Greece were even more telling of the market's true
opinion of the EU debt deal and its aftermath. Before the deal,
yields on one-year Greek governments reached 193%. They had only
fallen to 154% (no solvent country pays anywhere close to this
amount) before the announcement of the Greek referendum. This yield
peaked at 200% today (November 1st).
Panic was caused by the proposed referendum in Greece because
polls show that the terms reached with the EU and IMF are highly
unpopular with the Greek people. Even though they have gotten an
incredibly good deal, the average Greek is focused on the
additional years of austerity that would be required on Greece's
part. Apparently, neither the Greeks, nor the markets like hearing
that there is no free lunch.
Author: 'Inflation Investing - A Guide for the 2010s'
Organizer, New York Investing meetup