Tuesday, February 10, 2015

Greek Market Action Impact is Slowing

Several conflicting news reports came out in the overnight hours and during the morning trading session, and both reports created some minor fluctuations in the US market.  Of interest, though, is that the fluctuations truly were minor.  The first report provided some hope of compromise on the Greek Debt situation, and indeed the US market was up a solid 100+ points in early trading.  Reports had surfaced that Greece would get a six-month extension to pay off its debt, and that provided a bit of market optimism given the looming February 28th deadline for compliance.

Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false.  The market reacted by pulling back all of its gains since the open, and briefly traded flat.  Very briefly.  Almost immediately, in fact, the market started to trend back towards its early highs.

As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning.  To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil.  What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.

Specific to Greece, there will almost certainly be a compromise brokered at the last minute.  With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact.  Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone.  Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion.  Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.

Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan.  According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere.  "It could the United States at best, it could be Russia, it could be China or other countries," he said.  The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.

It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone.  Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties.  China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal?  China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.

Wednesday is the day where it should get interesting.  European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting. 
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement.  (The new government was elected on a platform that included the elimination of the current austerity measures.)  He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal.  So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.

It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement.  It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely.  Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance.  In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone.  Anything short of that benefits neither Greece nor the Eurozone.

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