Mon 2/6/12 4:59 PM Stocks Erase Losses, Greek Default

This year, every time the US market sells off in the AM over news from Europe’s debt mess, it gains the loss back by the end of the day or by the next day. Today was another repeat.

Greece was supposed to have completed a deal with its private creditors today in order to have done in time the early steps needed to avoid a default on March 20. It is now nearly 11:00 PM in Greece and no deal is done. Creditors are apparently unwilling to do a voluntary deal that forces them to take big losses and lengthen the time for which they are exposed to Greek debt issues, at least on the terms being currently offered.

Germany seems to be increasingly indifferent on whether there is a default, apparently feeling that the EU could withstand a Greek default and still remain in the Eurozone. They then might loan Greece more money after the bonds default.

Everyone seems to agree that Greece has been willing to agree to austerity but very slow to implement it, like the child that says “sure” to a request and dawdles their parents’ patience has finally completely run out. It is also agreed that austerity is depressing the Greek economy, making repayment less likely. In addition, 50% of Greeks are unionized and on strike today. Last, new elections are due in eight weeks and we all know how reluctant politicians are to promise more austerity and pain to voters just weeks before an election.

German opinion is correct I think, when it portrays Greece as an incredibly spoiled child who refuses to grow up and take responsibility for its problems and making restitution. If you have ever had or known a troubled teen hooked on self-destructive habits you will have an idea of the likelihood that continually loaning them more money and expecting a payback will work.

While the markets are pricing in something like a 20-40% chance of a Greek default, my own opinion is that is is much higher than that, especially if you consider an “orderly” default, sort of like our Chapter 11 bankruptcy for US corporations. Look how well General Motors is doing after going such a default a couple years ago.

My guess is that even with all the seeming support for stocks that stocks worldwide will have a hard time making higher highs while the Greek mess plays out. They probably won’t fall much either.

The big question immediately is how long it will drag on. Portugal is in real trouble too and fortunately it is very small, as is Greece in the grand scheme of things. The bigger troubled countries like Italy and Spain have done much better since the ECB made very low cost loans available to them recently so contagion fears have receded quite a bit, one reason why Germany seems to be so little worried right now.