I got home too late tonight to make this a Friday posting but, given the day's news, we really should wait one more day for an update anyway. That's because today Greece rejected a 5 month extension on its bailout so now the EU will meet on Saturday to determine whether to kick Greece out. Sentiment about what the fallout of such a drastic action would be ranges all the way from total economic catastrophe to nothing. My guess is we'll be in the same position this time tomorrow as we are right now. Since everyone is waiting on Saturday's meeting, the real update will be then. Today, volume was average and the Dow moved up a modest 56 points. Whether this will come tumbling down or nothing at all after Saturday's meeting, we'll see.
Saturday, 6-27-15
My prediction that nothing much would really change today pretty much happened. Today was supposed to be drop-dead for Greece and after today's continued deadlock in Brussels the EU is now assuming default come Tuesday.
But the 18 members don't exactly seem to be in agreement on this, the sentiment being that whatever happens Tuesday, Greece should remain. This particularly makes sense from the point of view that the Greek government has now called for a referendum July 5th to let the voters decide whether the government should cave to the EU's demands. The polls show that 57% of Greeks favor this so it's really a no-brainer to wait for this to play out. As there are currently no signs of panic in Athens, that is the likely outcome. The EU is taking a big chance for damage to its credibility if they lose Greece and the Greek government is risking losing their jobs if the people vote them down July 5th. Part of this is the EU's fault. The banks have been making good profits from investing Greece's debt payments, profits which were promised last week to be applied to the June 30th deadline to avert the crisis. Greece's walkout on Friday was partly due to the EU's reneging on that pledge. So there is blame on both sides and both sides have as much to lose as the other. That's why my prediction is that the EU will blink on Tuesday and there will be no default, just as has happened every other time. So stay tuned. This drama is hardly over. Following the Friday and Saturday updates is an essay providing a short course on the likely outcomes should there actually be a Grexit.
Markets |
S&P 500 ends down week with flat session, semis fall
DJ: 17,946.68 +56.32 NAS: 5,080.51
-31.69 S&P: 2,101.49
-0.82
REUTERS/LUCAS
JACKSON
The S&P 500 closed flat on Friday but ended lower for the week, with investors
cautious ahead of a meeting in Europe that could decide whether Greece will default on critical loans.
The Dow closed higher, boosted by strong results from component
Nike Inc (NKE.N),
while the Nasdaq ended solidly lower on disappointing
results from Micron Technology Inc (MU.O),
which weighed on chipmakers like Intel.
In Europe, Greece rejected a five-month extension of
bailouts on Friday, a day before euro
zone finance ministers will meet
to decide the country's fate. Greece needs fresh funds to avoid defaulting
on a $1.8 billion debt repayment to the International Monetary Fund on June 30.
If it defaults, it may have to leave the euro or the European Union,
potentially shaking the region's economic foundations.
"If this issue gets resolved, then we're set up for a
fairly decent market, but it could be that everything falls apart on the
30th," said James Meyer, chief investment officer at Tower Bridge Advisers
in West Conshohocken, Pennsylvania. "Market valuation is high in an
absolute sense."
Nike (NKE.N) rose
4.3 percent to $109.71 and was the biggest boost to the Dow after reporting a
better-than-expected quarterly profit, lifted as it sold more high-margin shoes
and apparel at higher prices.
Micron Technology (MU.O) sank
18 percent to $19.66 a day after forecasting a further decline in prices of
chips used in personal computers. It also gave a revenue outlook for the
current quarter that was well below market estimates. The PHLX Semiconductor
index .SOX fell 2.4 percent. Intel Corp (INTC.O) fell
3 percent to $31.02.
In the latest economic data, University of Michigan's final
reading on the overall index on consumer sentiment for June was 96.1, higher
than the preliminary reading of 94.6.
Investors have been keeping a keen eye on data to see if the
U.S. economy has recovered from a slow start at the beginning of the year. The
Federal Reserve has said it remains data dependent and expects to raise rates
when it sees a sustained rebound in the economy.
The Dow Jones industrial
average .DJI rose 56.72 points, or 0.32 percent, to
17,947.08, theS&P 500 .SPX lost 0.71 points, or 0.03 percent, to
2,101.6 and the Nasdaq Composite .IXICdropped 31.69 points, or 0.62 percent, to 5,080.51.
For the week, both the Dow and S&P
500 fell 0.4 percent while the Nasdaq fell 0.7 percent.
Declining issues outnumbered advancing ones on the NYSE by 1,752
to 1,334, for a 1.31-to-1 ratio on the downside; on the Nasdaq, 1,647 issues fell and 1,152
advanced for a 1.43-to-1 ratio favoring decliners.
The benchmark S&P
500 index was posting 16 new
52-week highs and 21 new lows; theNasdaq Composite
was recording 137 new highs and 62 new lows.
About 6.17
billion shares traded on all U.S. platforms, according to BATS exchange
data, compared with the month-to-date average of 6.09 billion.
Friday's volume was
impacted as the FTSE Russell rebalanced its indexes. As
companies move from one index to another, managers of index-following funds are
forced to buy or sell shares to mimic the performance of the index.
Markets |
Euro zone readies for Greek default after Tsipras
referendum call
Greece's European
partners shut the door on extending a credit lifeline to Athens, leaving it
facing a default that could push it out of the euro after the leftist
government rejected tough lender demands and put their bailout deal to a
referendum.
Finance ministers of the other 18 countries sharing the euro met
for the first time without Greece and
flatly rejected its pleas to extend an expiring bailout until after the referendum on July 5 and
setting the stage for Athens to default on a crucial IMF payment on Tuesday.
The 18 pledged to do whatever it takes to stabilize the common
currency area and said they were in much better shape to do so than at the
height of the euro zone crisis a few years ago. In a formal
statement, they also implicitly urged Greece to impose capital controls to
stabilize its banking system.
The rejection of an extension piled huge pressure on Greek
banks, which depend on central bank support to remain afloat, with long lines forming in front of
cash machines as people rushed to pull their money out while the banks were
still operating normally.
After its surprise decision to call a referendum on the bailout,
Athens asked for an extension of Greece's bailout program beyond Tuesday, the
day it must pay 1.6 billion euros to the International Monetary Fund or
default.
But the other 18 members of the euro zone unanimously rejected the request,
freezing Greece out of further
discussions with the European Central Bank and the IMF on how to deal with the
fallout from a historic breach in the EU's 16-year-old currency.
The swift rejection was a startling demonstration of the degree
to which Tsipras had alienated the rest of the currency bloc with a final-hour
announcement that upended five months of intense talks.
The Eurogroup of finance ministers shut Greece's Yanis
Varoufakis from a meeting in Brussels and issued a statement without him,
accusing Athens of breaking off negotiations unilaterally.
"The current financial assistance arrangement with Greece will expire on June 30, 2015, as well
as all agreements related to the current Greek program," it said, making
clear its refusal of a grace period to hold the vote.
Varoufakis said the
refusal to provide an extension "will certainly damage the credibility of
the Eurogroup as a democratic union of partner member states".
"I'm very much afraid that damage will be permanent."
The Greek parliament met to approve the referendum, with
pro-European opposition parties uniting in condemning the decision and fuelling
speculation that Tsipras'
leftwing government may have to resign if voters back the bailout in the July 5
referendum.
Greek President Prokopis Pavlopoulos was expected to meet former
conservative Prime Minister Antonis Samaras on Sunday.
The offer from creditors
requires Greece to cut pensions and raise taxes in
ways that Tsipras has long argued would deepen one of the worst economic crises
of modern times in a country where a quarter of the workforce is already
unemployed.
Caught between fears of economic collapse and defiance of the
demands from international creditors, many Greeks expressed shock, although
opinion polls published in Sunday newspapers pointed to a majority in favor of
accepting the bailout terms.
"They are trying to kill us. I don't think this is a
dilemma on whether to stay or leave the eurozone.
But those bailout terms cannot be accepted," said 70-year-old George
Kambitsis. "We don't have any money, but they want to take more from us.
How will we eat, how will we live?"
However voters in other euro
zone states -- including the
bloc's economic powerhouse Germany, other southern states which have suffered
austerity in return for EU cash and poor eastern countries with living
standards much lower than Greece -- have lost patience.
REFERENDUM
Many questions remained over the referendum, which is being
called over the terms of a bailout offer that may no longer be on the table.
But with fears growing
that the foundations of the euro
zone could be fatally weakened
ifGreece were forced out, French
Finance Minister Michel Sapin insisted that Paris, at least, was still prepared
to talk.
"The 18 countries,
apart from Greece, all said
clearly that Greece was in the euro and should remain in
the euro whatever the difficulties of the moment," he said.
Although European officials have repeatedly insisted that
financial firewalls built during the euro zone debt crisis of the past six years
would limit the impact of any "Grexit", the longer-term effects are
completely unknown.
Jeroen Dijsselbloem, the Dutch finance minister and chair of the
Eurogroup, said Greek lawmakers should think about whether the referendum was
wise before agreeing to hold it, essentially appealing directly to the Greek
parliament to defy Tsipras when it votes on approving the measure later on
Saturday.
RELATED
COVERAGE
Underlining the mutual incomprehension that has marked months of
often angry exchanges between the Syriza government and its European partners,
Finance Minister Yanis Varoufakis was still holding out hopes of a deal.
"In these crucial moments, the Greek government is fighting for there to be a
last-minute deal by Tuesday," he said after the euro zone had rejected further talks and said it
would cut off financial support from June 30.
He added the government
would be prepared to recommend that voters backed the deal if lenders agreed to
improve the terms.
The euro zone finance ministers met in Brussels for
what had been intended as a final negotiation for a deal.
But after they were blindsided by Tsipras's surprise
middle-of-the-night announcement that he rejected their offer and would put it
to voters only after Tuesday's deadline, one after another said all that
remained to discuss was "Plan B" - how to limit the damage of
default.
"We have no basis for further negotiations," German
Finance Minister Wolfgang Schaeuble said ahead of the meeting. "Clearly we
can never rule out surprises with Greece,
so there can always be hope. But none of my colleagues with whom I've already
spoken see any possibilities for what we can now do."
Finland's Alexander Stubb called it "potentially a very sad
day, specifically for the Greek people. I think with the announcement of this
referendum we're basically closing the door for any further negotiations."
With most Greek banks
closed for the weekend, there was no sign of panic on the streets of Athens.
Government officials said there was no plan to impose capital controls that
would limit withdrawals.
But police tightened security around bank teller machines as
lines formed at some in the darkness almost as soon as Tsipras's early hours
televised speech was finished. More than a third of automated teller machines across Greece ran out of cash on Saturday before
they were replenished, banking sources said.
The Bank of Greece said it was making "huge
efforts" to ensure the machines remained stocked.
Markets |
Factbox: Possible scenarios for Greece after a default
Euro zone finance
ministers are discussing how to handle the fallout from a Greek default next
week after Athens broke off negotiations on a financing-for-reforms package and
called a referendum on the creditors' reform demands for July 5.
Greece has to pay
1.6 billion euros ($1.8 billion) to the International Monetary Fund next
Tuesday but does not have the money and because it is cut off from markets it
can only avoid defaulting if it fails to get new loans from the other euro zone governments.
Until Saturday the last-ditch option to cover the IMF payment
for Athens was to strike a deal on reforms and make available 1.8 billion euros
worth of profits made by the European Central Bank on purchases of Greek bonds
during the debt crisis.
But because Greece ended talks on a deal last night and
called a referendum, the money cannot be disbursed and Greece is on course to default on Tuesday.
CAPITAL CONTROLS
The prospect of a default may trigger a bank run in Greece as soon as Monday, a prospect which
could cause the government to introduce capital controls on Sunday.
If the outflow of deposits does not accelerate on Monday, it
might happen once Greece formally
defaults on Tuesday.
There were no signs of panic on Saturday morning but more people
than normal were taking money out of ATM machines and one of the few banks open
at the weekend had a queue of dozens of people waiting to get in and then it
did not open.
WHAT HAPPENS AFTER TUESDAY?
Once Greece is formally in arrears with the IMF, euro zone governments will have to decide if
they want to demand the full repayment of their loans, making use of what is
called cross-default clauses allowing other lenders to demand to be paid back
if Greece defaults on one of them.
Euro zone officials
have previously indicated that they were unlikely to do that, so as not to make
Greece's financial situation even more difficult. The decision is ultimately a
political one.
ECB LIFELINE
The European Central Bank will have to decide if it can continue
supporting the Greek banking system with its emergency liquidity assistance
(ELA) next week after the government defaults on the IMF payment.
ECB officials have been signaling that they would continue to
support Greek banks as long as they have enough collateral. However, a default
on the IMF and no prospect of financing from the euro zone through a financing-for-reforms deal
may mean that the value of Greek collateral will fall dramatically, ending the
ECB's support line.
REPAYMENT ON ECB-HELD BONDS
The European Central Bank may also choose to wait before
withdrawing its support until July 20, when Greece has to redeem maturing Greek bonds
worth 3.5 billion euros held by the ECB.
If Greece does not repay what it owes then, and
it is unlikely to find the money without euro
zone support, it would be hard
for the ECB to continue providing Greek banks with more money.
IOUs AND SLOW EXIT FROM EURO
Without the support of the ECB, the Greek banking sector will
likely collapse and Greece will have to introduce a parallel
currency in the form of some debt instrument like IOUs to cover the
government's domestic obligations.
This parallel currency to the euro could become the new Greek
currency. It is unclear how longGreece could
or would be willing to have two currencies,
one of which -- the IOUs -- would very quickly undergo a major devaluation.
REFERENDUM ON JULY 5
The Greeks are therefore likely to go and vote in the referendum
on July 5 amid cash shortages, capital controls and possible social unrest. The
Greek government has steered public opinion toward voting "no" to the
creditors' demands, which would effectively be a vote on leaving the euro.
IN CASE OF A GREEK VOTE FOR REFORMS
If Greece votes in the referendum to agree to
the creditors' conditions for further financial help, the government would have
to ask for and negotiate a third bailout program with international lenders.
Such negotiations would probably take many weeks or even months
because they would be even more difficult than those that broke down this weekend,
officials said.
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