Will Greece be saved?

Stocks are being held captive by the undulations of the euro, which in turn is being held captive by political machinations in Europe.

By Anthony Mirhaydari May 24, 2012 2:08PM

I don’t know about you, but this market is making me a little seasick. For the third day in a row, stocks are alternating between gains and losses. The catalyst for all this is the situation in Europe, with Greece on the precipice of quitting the euro (or getting the boot) while the Spanish banking system implodes from the stress.

 

As a result, the euro dropped to its lowest levels since 2010, pulling down risky assets in general, since hedge fund types and computer trading algorithms use the euro as a measure of "risk on" sentiment. Large-cap defensive stocks and gold futures alike are rising and falling based on what currencies are doing. The bad news is the volatility isn't going to stop until Germany or the European Central Bank take action to calm the situation, at least until the next round of Greek voting in late June. Here's what to expect.

 

 

For Germany, it's becoming increasingly isolated as the new president of France leads the charge -- joined with leaders of Italy and Spain -- for closer fiscal integration via bonds issues by the entire eurozone. For the ECB, financial markets and bank executives are clamoring for another round of monetary policy stimulus via ultra-cheap loans to eurozone banks.

 

I believe both will be pressured into action.

 

The Germans are increasingly finding themselves alone in their pro-austerity, anti-debt, anti-stimulus stance.

 

Just look at the austerity backlash and resulting political machinations underway in the Netherlands, a fellow AAA-rated "core eurozone" member. Look at the way both the International Monetary Fund and the Organization for Economic Co-Operation and Development have come out in support of issuing eurozone bonds.  

 

Italian Prime Minister Mario Monti said that Wednesday's eagerly awaited eurozone summit featured extensive talks on eurozone bonds, of which a majority of officials are now in favor of. Today, he brazenly added that these bonds -- which will help address some of the structural flaws in the euro -- will become a reality very soon. 

 

Germany may find itself with limited political maneuverability if the eurozone's other large countries push forward with the Eurobond idea. Once launched, Eurobonds would rescue the borrowing costs of countries like Spain and Greece, giving them time to address their deeper problems including a weak banking sector and inefficient labor markets.

 

One possible outcome will be for Germany to compromise by endorsing another idea being pushed by Italy and others: A pan-eurozone bank deposit guarantee to help stop a bank run from developing in Greece. This would also do much to calm the crisis by neutralizing a potential accelerant: Loss of confidence in the financial system.

 

Indeed, Wednesday's dramatic late session rebound was attributed to unconfirmed chatter that switch a deposit guarantee scheme was about to be endorsed by German Chancellor Angela Merkel.

 

The European Central Bank is also under pressure to act, but from a different source.

 

 

Policymakers there are no doubt growing increasingly concerned over the rising imbalances within its cross border payments system (known as Target2) as capital is pulled out of peripheral countries and their banks -- including Greece and Spain -- and moved into more secure German banks. As a result, the German central bank, the Bundesbank, is pumped some €644 billion (24% of Germany's GDP) into these weaker economies to compensate for the capital outflow.

 

If Greece bails out of the euro, the ECB will be on the hook for these losses. And if Greece goes, Ireland, Portugal, and Spain might go to. Overall, that would be worth more than €300 billion in Target2 exposures to the Bundesbank -- exposures that would no doubt get worse once a full blown financial crisis was underway.

 

Inter-bank funding stresses grow, the ECB will feel the need to intervene to prevent this nightmare scenario from unfolding.

 

Stocks, and precious metals, are bottoming on expectations of something, anything constructive coming from Germany and/or the ECB in the days and weeks to come. The evidence suggests they can't keep saying no for much longer.


Trading update

I am adding one new pick to my Edge Letter Sample Portfolio, far east energy play InterOil Corp. (IOC). Shares of IOC are breaking out of a three-month consolidation pattern on a nice surge of volume.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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122Comments
May 24, 2012 3:04PM
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Will Greece be Saved?

 

I sure the hell hope they go down the tubes. Greece is not TBTF. England, Germany, Norway, Finland, Sweden, Switzerland, and the other fiscal conservatives should cut France, Italy, Spain, Greece, Portugal and the other lazy southerners lose. 

May 24, 2012 3:29PM
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If eurobonds are issued---the only losers are the fiscally responsible ountries, Germany, Netherlands, Finland.  and the 'neer do wells' get the benefit.  Why in the hell should Germany be responsible for, and pay for, the fisclly irresponsible?  Just like O**** wants to do here.
May 25, 2012 12:06AM
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Better question...will the U.S. follow in Greece's footsteps??
May 25, 2012 4:53AM
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Obama is taking us down the path of economic destruction and ruin. Democrats have absolutely no understanding of Economics . They believe the left-wing professors in places like Harvard, or Yale who preach the Socialist gospel. Some are smart enough to not believe these so-called experts. I received my degree late in life. I had over 25 years experience in Operations Management when I had to take a course in it at College. I was barely able to get a "C" because I disagreed with the Professor who was a condescending know-nothing who had nnever worked in the field and got all of his info from people like himself.

The situation in Greece and other countries is caused by tax and spend Liberals. The entire western world is heading down this same path because the Socialists run all of Europe and most of South America and other developed nations in Asia.

Until a nation goes into the economic abyss, no one else is going to believe it can happen to them.

 

Greece may be the first, but it will not be the last. All of Europe is heading in the same direction since they all spend more than they take in on social services... especially healthcare.

 

The USA is following in their footsteps and will continue down that path until Obama is sent back to Chicago.

May 24, 2012 9:46PM
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I am glad that Germany is standing firm.  The European countries and America as well have had since WWII to address their structural issues and banking weaknesses.  If the eurobond solution was a solution to give them more time to address their issues I would be in favor of it.  But they have the same problem that we have here in the U.S. ....it is not politically possible for our leaders to get our house in order and spend within our means by spending  what we produce and no more.  I am afraid we all will need to go through rough times, the system will have to crash to reset and we will all have to suffer now instead of pushing the debt that is mounting like a snowball to the next generation.  Our generation is spoiled and do not want to suffer and so our politicians are the ones that we elect to push the debt down the road to future generation.  It is incredibly selfish.   The Europeans and we Americans are going to have to learn to live without normal healthcare, pensions and bloated government beauracracy and a 12 carrier group Navy for a generation so that we can clean the house of non producing Wall Street money managers, Bankers and Government workers that do not give an honest days labor for an honest days work.   When this happens, people will become more real again, appreciate the small things in life, need each other and maybe enjoy daily life in a more balanced way.

More bailouts and time here and in Europe will only add more gasoline to the fire and will not last long...just like our quantitative easing 1 and 2 here did not solve the problem but put more money in bankers pockets.  Unemployment will only change in all of our countries when our currencies become valued at what they should be valued and the Euro is no longer.  This will bring back manufacturing to all of our countries because the currencies will be valued based on GDP and exports and manufacturing and the weaker countries will have lower value currencies which will make them more competitive and bring a manufacturing incentive there.  We need this so that China is not the manufacturer for the world, which snuffs out everyone else and makes them either a service economy or a commodities exporter which is not diverse enough.  Then all of the countries will offer a value added  production based economy with high level engineering and production and an increase in  real local taxes, not by raising taxes but by creating more taxpayers which is called widening the tax base which is the only solution out of this mess.

Angela Merkel, if you read this, stay tough, don't give in.  We all need the medicine of what needs to happen. 

Adam Even, Richmond VA, USA 

May 25, 2012 1:44AM
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Funny how a financially irresponsible nation can hold the whole Euro Zone hostage... "Bail us out or we'll go bankrupt and take the rest of you down with us"...
May 24, 2012 7:30PM
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France, Spain, Italy....they're all falling fast because of their ways of handling money. The Germans are absolutely correct and I hope they continue to stand strong against the pressures from whiny, soft outsiders who wish to continue with the delusions of the past so they can parasitize and manipulate the capital.

Stand strong Germany!

Let those who are entangled in the finances of the economically challenged and who've made it this way suffer their well-earned consequences. Let them all start over from the bottom of the foul-smelling cesspool they socialised themselves into.

May 24, 2012 6:31PM
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Greece is toast. There IS NO stopping it -it's inevitable. The longer they drag this out, the worse the hurt is going to be. Let Greece go its own way.
May 24, 2012 7:53PM
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Greece needs to be set free, and so does the rest of the Union. The experiment has failed. Great in principal, but not practical unless you have only one government for all 17 countries. Look how many problems we have with our finances with one government, imagine getting 17 countries to agree on one direction for all. 
May 25, 2012 12:14AM
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They will go bankrupt and default because the government and the people refuse to do what is necessary to get out of the crisis. What will happen there will spread like dominoes causing a world crisis because of to many liberals and progressives in power. It will take a world crisis to resolve most of it.
May 25, 2012 10:43AM
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Greece should be allowed to fail.  Cut them loose and be an example to the others of what is in store for them if they don't bite the bullet, now.  Without a concrete example to point to, other countries will just keep kicking the can down the road.  A Greek failure just might wake up the U.S.Congress to straighten out our idealogues and break up the log jam.
May 24, 2012 5:54PM
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kick lazy arrogant Greece out..The've earned it..Let Spain see what happens.. Then tell Spain they're next if they don't fall in line..
May 24, 2012 10:12PM
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What is Obama doing.  I'm sure he doesn't know.
May 25, 2012 9:42AM
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Citizens, look over your shoulder towards Greece, that's where we are headed under Obama. Don't think it can't happen. I'm sure the people of Greece, Italy, and Spain didn't think so 10 years ago either.

Socialism > It's inherent value is the equal sharing of misery by all when the free money runs out

May 24, 2012 10:05PM
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Yea we will probably bail them out for their irresponsible investments just as we did for the banks. Us working class pay for it all
May 24, 2012 5:01PM
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People need to remember....This is nothing about what Germany wants!

 

Everything is about the "too big too fail" and making sure their bets don't fail!

 

Our world is infested with financial criminals

 

Just look what happen with the Facebook IPO...that was the epitome of financial criminality and nobody will be held accountable!

May 24, 2012 6:59PM
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Greece is toast.  There was a small skiing town in the Austrian Alps which raised it prices too high.  The Germans didn't complain, but the next year no one showed up to ski.  So the worse is yet to come for Greece.  Not paying your loans back?  Not living up to the deal we made?  Fine, the (many millions of) Germans will go to Spain not Greece this summer.   No tourist income this year = real end for Greece.
May 24, 2012 3:52PM
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I would not bet the ranch that Greece will stay with the Euro.  There are just too many negative issues.  But this market is not making much sense.  It needs a reality check. 
May 25, 2012 9:13AM
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Don't think for a moment we aren't headed in the same direction as Greece under Obama. This administration keeps fudging the actual unemployment numbers and actual debt amount in a effort to hide it from us until election...It is absolutely disgusting how we have been lied to by Obama to cover his inept leadership. The word SOCIALISM should scare the daylights out of you..A great idea until you run out of other peoples money and are left with the reality that socialism is the Equal Sharing of Misery for ALL.....We are almost there, look over your shoulder to Greece
May 25, 2012 11:34AM
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Doug....

Austerity means "OMG! we CAN'T afford to spend more than we take in!!!"  It means balancing a budget. It means common sence. It means less TAKING from producers to give to NON PRODUCERS.

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