Greek Tragedy: Investors Need To Sober Up24 June, 2011, 4:57. Posted by Zarathustra
Tags: Debt, Economy, Euro Crisis, Europe, Greece
The market reaction to what’s happening to Greece over the day has been erratic at best, or idiotic at worst.
Early on, there were some reports saying that there was a “hole” in the budget plan. The exact size of this hole seems to be inconsistent across various reports, but roughly speaking, there are billions of euros of funding gap in the austerity plan. The market has taken it very badly, with the US dollar and US Treasuries rising (risk off!). In early New York trading, the Dow Jones Industrial Average dropped more than 200 points.
The situation changed later the day though, as headlines came through the screen saying that Greece has sealed a deal with EU and IMF. I am not sure whether anyone know what the deal was all about (the hole is filled, perhaps), yet the market reacted as if all people have only seen the word “deal”. Stock markets rallied towards the end, with the S&P 500 only down 0.28%.
The problem with this knee-jerk reaction, however, is that the Greek problem is anything but solved. To begin with, the plan needs to be approved by the parliament, which is much less than a sure thing. The opposition will most certainly vote against it, while Alexandros Athanasiadis, a ruling PASOK party MP, said he is going to vote against the new austerity plan. Mind you that the PASOK party has now only got a 5-seat majority in the Parliament, so after losing Alexandros Athanasiadis’ vote, the majority will be cut to four. That means the chance of making it through is actually not far from 50/50. Outside of the parliament, unions are calling a general strike to coincide with the budget debate. The ruling party is certainly getting very unpopular, so it is not at all unimaginable to see more government MPs to not follow the party line.
A more fundamental problem, however, is that Greece is really unable to repay, full stop. As I have mentioned early, the math doesn’t not really work, and the idea that bailing out Greece to buy more time can solve the problem is simply a wishful thinking. One has to realise that the real solution is a reduction of its debt burden, which essentially means a default in some form or another. Lending more money to a insolvent government will not solve the problem, and at some point in future, it will come back to haunt you.
In short, investors really need to sober up.