Markets

Greek Debt Crisis and Bailout Not as Bad As You think

I don't know about you, but I'm getting a little tired of the global news machine focusing on Greece every day. It is a small nation with a small economy. My favorite image of that "crisis" came last Thursday morning, when CNBC showed Greek police on motorcycles in Athens waiting for the daily protestors, whose numbers had been diminishing, and whose protests were becoming more peaceful. Even though public sector services were unavailable, as hundreds of thousands of workers walked off the job to protest austerity cuts, most workers were enjoying a free day off rather than publicly marching in violent protest.

In other words, the news media seemed disappointed that Thursday's protests in Greece were becoming peaceful. This may be due to the latest cash infusion into the Greek economy. The Greek bailout is taking place, despite taxpayer protests in Germany and France. Greece is enjoying a fresh influx of capital:

  • First, Greece received 5.5 billion euros (nearly $7 billion) from the International Monetary Fund ( IMF ) on May 12 as part of the first 20 billion euros ($25 billion) of the IMF's financing plan.
  • Then, last Tuesday, Greece received 14.5 billion euros ($18 billion) from the European Commission ( EC ). Germany contributed the most, 4.4 billion euros ($5.5 billion), with France coming next at 3.3 billion euros and Italy adding 2.9 billion euros.
  • The European Central Bank ( ECB ) also bought more than $20 billion in European sovereign debt instruments based in Portugal, Ireland, Italy, Greece and Spain.

My guess is that Greek workers will get back on the job soon, but the cameras won't cover that event. "Mission Impossible" will quietly disappear from the headlines, as the media move on to the next scare, which will probably be the growing budget shortfalls in several U.S. states.

Greece Debt Problems Second to U.S. Budget Woes

On Tuesday, the Financial Times reported that "U.S. state pensions are becoming a federal issue." The FT article profiled Illinois as a "foster child of unfunded pensions," pointing out that it has $78 billion in unfunded liabilities and that $4 billion of Illinois' $13 billion 2010 budget deficit comes from lower state pension contributions.

Related: 9 Hot Europe Stocks Leading the EU Rally

The Treasury Department is already helping to keep 32 states afloat. According to the EconomicPolicyJournal.com, 32 states have run out of funds to make unemployment benefit payments and the U.S. Treasury has stepped in with funds for the unemployed. However, an economic recovery will cure many of these ills. The fact that sales tax revenue is now rising in most states, including California, is evidence that comparing California to Greece is mostly just financial media entertainment. California is almost four times bigger than Greece, and it is home to Silicon Valley and other innovative companies, so California at least has the potential to grow its way out of some of its fiscal problems, unlike Greece.

Short Selling Rules Are Short Sighted

The market rebounded on Friday after the German Parliament formally approved Germany's contribution to the euro-zone bailout plan. The lower-house (Bundestag) passed the bill 319 to 73 (with a stunning 195 abstentions). Germany's upper house, which represents the16 federal states, also backed the bailout. The bill calls for Germany to add 123 billion euros ($154 billion) to the EU and IMF rescue package. Despite the German media calling themselves the "schmucks of Europe," the debate is effectively over.

Related: Is the Greek Debt Crisis Actually Good for Europe?

However, last Tuesday, Germany also tried to stop speculation in the financial markets by implementing a partial ban on "naked short selling" of certain securities. Bafin, Germany's financial regulator, said the ban was needed because of the "exceptional volatility" in euro-zone bonds and the widening of spreads on credit default swaps. Additionally, Bafin said that large-scale short selling could "endanger the stability of the entire financial system." But Hans Redeker, chief currencies strategist at BNP Paribas in London, said that Germany's move is "foolish, to say the least. The decline of the euro and inner [bond] spread widening has very little to do with speculation, but is the result of excessive debt and deficits."

In the interim, the euro has rallied significantly from $1.22 on Tuesday to almost $1.26 on Friday, in the wake of the Greek bailout and Germany's short-selling ban. Interestingly, the European Commission, the EU's executive arm, suggested that Germany acted unilaterally on a trading ban that should be discussed by all EU finance ministers. French Finance Minister Christine Lagarde said France should be consulted in such moves, adding "France is not considering banning naked credit default swaps on sovereign debt."

Investor Confidence Should Be Top Priority

Similar moves are brewing in the U.S. On Tuesday, the SEC proposed new rules to introduce uniform "circuit breakers" for all stocks in the S&P 500, in an attempt to avoid extreme inter-day volatility, like the five-minute "flash crash" on May 6 that caused a 99.86% drop in the iShares Russell 1000 Value ETF, careening from $59 to 8 cents in five minutes. Apparently, no one bought shares at that low bid, but that was little consolation for investors, some of whom lost over 60% on that one day in a "stable" ETF fund.

Interestingly, the SEC report said "We have found no evidence that these events were triggered by 'fat finger' errors, computer hacking or terrorist activity, although we cannot completely rule out these possibilities." The Commodity Futures Trading Commission ( CFTC ) and SEC are meeting today to discuss a "possible linkage" between cash equities and index products in the futures market, creating a "severe mismatch in liquidity" due to different trading conventions across the main trading venues.

Related: Greek Bailout - Ireland, Portugal or Spain May Be Next

In the meantime, these new circuit breaker rules will kick in if the S&P 500 swings more than 10% intra-day. In that case, all trading will be halted for five minutes. This rule will be in effect on a pilot basis until December 10, while the SEC solicits public comments. One thing is for certain: The SEC and other regulators ought to figure out what actually happened on May 6 before they set out to "fix" the problem.

Investors pulled $2.8 billion out of U.S. stock market mutual funds in the week of May 6 to May 12, according to Lipper FMI. Lipper cited "risk aversion," calling this "an about-face which suggests that investors have lost confidence in the direction of the markets." Investors also pulled $1.8 billion out of high-yield corporate funds. While those are not large percentages of total market capitalization, they represent a growing fear that market quotes are not as reliable as investors once thought they were.

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      The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


      The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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