July 28th, 2010 – The United States got a wake up call late last year. Word of a potential Greek debt default sent the euro and worldwide equity markets spiraling lower. Sleepy traders were caught dumbfounded, wondering what was causing the selling. The connection between every financial system was made clear as Greece’s relatively tiny economy shook the entire world. This interconnectedness is only going to get tighter as technology makes the globe smaller and smaller. The importance of all traders keeping an eye on international events is a powerful lesson to take away from the sovereign debt situation in Greece.
The debacle has definitely stabilized since the European Union and the International Monetary Fund approved a whopping 110-billion-euro aid package to save the struggling island nation. Signs of improvement are starting to emerge. However, will Greece regain its status without further issues or is more pain looming on
the near horizon?
The first challenge to Greece’s recovery came on July 13. That is when Athens hosted its T-Bill auction to rollover short term debt. This was more of a test or economic show of strength than an actual critical economic event. 2.16 billion euros of short term debt matured on July 16. Greece sold 1.625 billion Euros of 6-month T-bills. There is a three-year funding period for the EU/IMF bailout capital injection. Greece’s heavy debt to GDP ratio is predicted to peak at 149% in 2013. Although they auctioned off T-Bills, the arrangement permits Greece to avoid the international markets until quarter one, 2012. On the positive side, Greek’s finance minister recently stated that he is confident that they will meet the goals for this year. Greece is targeting a 40% reduction in their budget deficit to 8.1% of output. However, he added a caveat to his optimism, admitting that risk remains on revenue growth targets.
Unfortunately, even if Greece breaks out of this brutal fiscal trap, other euro zone countries appear to be floundering. Spain and Portugal may be next, and even Italy is starting to appear shaky. Regardless of Italy’s relatively small budget deficit, the public has climbed to 115% of its Gross Domestic Product. This waves a dangerous red flag for future stability.
While it appears that Greece has the “first mover” advantage in getting bailed out, a dark specter still hangs over many of the euro zones economies. It appears a long rocky road remains ahead for the euro currency and the nations who use it. In addition, further shocks to US equities will likely occur as the extent of the euro zone’s issues hit the light of scrutiny. As traders, we should welcome the potential volatility to come. If we remain remaining vigilant, disciplined and nimble, profit opportunities will continue to abound.
Copyright 2010 Lightspeed Financial Inc. All rights reserved. Any comments or statements made herein are not an endorsement of any trading strategy or security and are made for informational purposes only.
