Cart (0)
business newsThrowing Aristotle a Lifeline
By
Josh Lipton Feb 09, 2010 3:20 pm
Investors react to Greek bailout rumors.
PRINT
 |
|
Investors today cheered hard as reports first circulated that Eurozone countries had decided in principle to come to the assistance of Greece.
So said Reuters, which, citing a German newspaper, also said that Deutschland was preparing an aid package for Greece.
CNBC is reporting that there are conflicting reports as of now, and a German government spokesman called the comments “unfounded.”
So, as we head into the close, investors are left with what they started the trading day with: lots of uncertainty.
Right now, the Europeans are under a lot of pressure to restore confidence among investors, who are spooked about whether the rising debt crisis in Portugal, Ireland, Italy, Greece, and Spain -- referred to now unfortunately by traders as PIIGS -- could morph into a financial contagion.
Already, notes Howard Archer, Chief European and UK Economist at IHS Global Insight, contagion has seen investor concerns over Greece spread to Portugal and Spain pushing up the cost of insuring their government debt to record highs.
The only real question for members of the Eurozone, says Dr. Ed Yardeni of Yardeni Research, is whether to boot out or bail out the Greeks.
Yardeni reminds us that the euro was established by the 1992 Maastricht Treaty. In order to participate in the currency, he points out, member states have to meet strict criteria such as a budget deficit of less than 3% of their GDP.
Turns out, the Greeks didn’t play by the rules. In January, the government there admitted that its budget deficit of 3.7% of GDP for 2009 was based on phony data. The real number? Try 12.7%.“That should be sufficient grounds for a divorce,” the investment strategist says.
But threatening to boot out the Greeks from the monetary union probably sounds too radical, Yardeni says. A bailout, he thinks, ultimately looks more likely.
There are those investment pros that think the Germans and French won’t step up to help out their Greek neighbors. As they argue, for all you folks living in Virginia, how attractive is the idea of bailing out your buddies in California?
But Archer of IHS argues that Eurozone members will, in fact, do whatever is necessary to save Greece, ultimately.
“There is massive substantial political capital invested in the Eurozone, and this is likely to prove the determining factor,” he says.
The economist emphasizes that the Maastricht rules contains a "no bailout" clause to ensure that a member country's budgetary problems couldn’t spill over and damage the credit rating of the Eurozone as a whole.
However, he writes in a recent research note, there's belief that the Eurozone could get around this by invoking Article 122 of the Lisbon Treaty, which allows the European Union to throw a financial life-preserver to a member country suffering tough times.
As we discussed in our article, Why Investors Should Put PIIGS in Perspective, pint-sized countries like Portugal and Greece, which is slightly smaller than Alabama, might not seem like they could pose much of a problem.
But strategists are quick to highlight that southern Europe accounts for 37% of the Eurozone economy and slowdown there, they think, could spill over and pull down Germany and France, which, out of self-interest, have to step up and lend a helping hand to their neighbors.
Jon Markman of Markman Capital Insight told his clients this morning that some sort of entente between Greece and the northern European overlords who run the EU, as he puts it, is likely.Markets may rally on news of a tentative solution, the market pro adds, as they did today, which is just what they did in March 2008 when the Federal Reserve and JPMorgan (JPM) brokered a way to deal with Bear Stearns’ debts.
“But this problem will not really go away, as the global deleveraging genie is out of the bottle again,” Markman writes, adding, “Our belief is that any market advance will likely be stymied at around the 1,100 level of the S&P 500, and that will be the best opportunity to put on short sales for the next leg of the decline.”
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
