Greek Crisis Ain’t Over Till Fat Lady Sings
Well, the German fat lady (Chancellor Angela Merkel) did sing, but her song rang hollow, and she was unable to sustain the final note. That’s because Greek Prime Minister George Papandreuo, gave her a sucker punch during her final note. Papandreuo suddenly switched his part from leading man to playing the fool by doing something incredibly stupid for his own career and for all the world. He decided to put everything in Europe at risk to save himself from public criticism of the European pact on which Merkel and others had worked so hard to create. Although this blow out of nowhere was no surprise to me (as I alluded to it in earlier posts), it was completely surprising to the leading lady and to the entire world audience. (See earlier articles The Greek Crisis and Consumer Spending Returns to Old Deficit Habits and Last-Minute Euro-Crisis Update.)
It’s looking more and more like my prediction of a crash that would start in October and that would be greater than the one in August could still prove true. The drop that began yesterday (October 31) upon some bad news from China to Europe took a steeper dive today on more bad news from Greece in a deal that I’ve stated all week is rickety at best. (And that is how I said it would happen — days of bad news out of Europe.)
Here are some news excerpts from Businessweek that describe the big turnaround from the meaningless stock market euphoria of last week:
U.S. stocks dropped, driving the Standard & Poor’s 500 Index to the biggest two-day slump in a month, on concern that a Greece referendum pledged by Prime Minister George Papandreou may threaten Europe’s bailout.
“I just don’t get it,” Michael Mullaney, who helps manage … Fiduciary Trust in Boston, said in a telephone interview. “A Greek referendum is a very risky proposition. Everybody thought last week that this crisis was behind us on a near-term basis, but Europe is going to be front and center.”
Greece’s referendum poses a threat to financial stability in the euro region and increases the risk of a “disorderly” default, Fitch Ratings said.
Europe is not addressing the basic problem. They are not giving the peripheral countries a way out of a recession.
As I’ve written all week, the rise in the stock market last week meant nothing. Anyone looking at the situation without rose-colored glasses could see the European deal to solve the Greek-Debt Crisis was riddled with cracks.
Witness this linked cartoon if you don’t get why the deal was rickety and nothing to be euphoric about.
American banks tumble as they take indirect hit from Greek crisis
Following losses by European lenders that are heavily invested in Greek debt, American banks took a dive, too. In the article I wrote three days ago, I said — in the middle of market euphoria — that the crash I’d predicted on the New York Stock Exchange (NYSE) could still come on schedule with last-minute bad news, which looked likely.
Yesterday, China backed away from the Euro Crisis debt deal, stating they could not be the savior of Europe, and the U.S. market took a big drop. Today, Greece put the deal up for vote, which risks collapse of the whole deal and puts it in limbo until the referendum is held. So, the stock exchange took another nose-dive.
Volatility indexes soar on news of renewed Greek Crisis
Volatility indexes are rising in the same way they did during the August crash where the supposedly recovering economy fell off a cliff that graphed out exactly like the crash of the markets in 1929. The Euro Stoxx 50 Index of volatility rose 22 percent today for a total rapid rise in the last two days of 37 percent. The Chicago Board Options Exchange Volatility Index rose 42 percent in the last two days, which shows that the U.S. has overnight become just as volatile as Europe. The volatility indexes have not moved like that since the August crash.
The Greek October Surprise
The second sound of bad news I anticipated yesterday happened today out of the blue:
The Greek government was plunged into chaos on Tuesday, as lawmakers rebelled against Prime Minister George Papandreou’s surprise call for a popular referendum on a new debt deal with Greece’s foreign lenders….
The revolt by lawmakers and a no-confidence vote planned for Friday raised the prospect of a government collapse that would not only render the referendum plan moot but could also scuttle … the debt deal that European leaders agreed on after marathon negotiations in Brussels last week.
The referendum announcement took European officials by surprise. The Greeks didn’t tell the European institutions, the European Central Bank, the French or the Germans, (The New York Times)
“This was completely unanticipated,” said John Canally investment strategist and economist for LPL Financial in Boston. “This vote in Greece is going to hang over the market for next week or so, unfortunately.”
“It is something that brings a great nervousness, that adds great insecurity to already great insecurity and therefore we need to see calmly how we will deal with this…. ” Intense selling roiled markets in Europe Tuesday. Italy’s main stock index dropped 6.8 percent. France’s fell 5.4 percent and Germany’s fell 5 percent. (MSNBC)
Today’s news from Greece was received throughout the world with complete shock. This will be the first referendum to be held in Greece in 35 years, yet Papandreuo had not breathed a hint that it might be coming throughout the intense European dialogue aimed at circumventing this crisis. (Imagine that!) The market reacted in disbelief. Readers of this blog, however, would not have found bad news about the Greek Debt Crisis coming out of highly volatile Greece any surprise at all. My main point in the past week has been that the Greek deal (or European pact) had so many holes in it that anything could make it crumble at any moment.
As one European Union consultant has said,
“If Greek citizens decide to vote against [the Greek Debt Crisis deal], it would be very difficult for the Greeks to stay in the euro zone. Maybe this is the most elegant way of leaving the euro zone, not members kicking out a country but the Greeks choosing, through democracy and with legitimacy to leave.” (New York Times)
It could well become exactly that. It seems the Greek plan unravels at one end as fast as officials try to repair it at the other end. No surprise here though. You did not hear any euphoria over the Greek plan on this blog, as you did all over the market. In fact, all over the WORLD. No, it was no surprise at all.
Bond prices jumped so dramatically that analysts said they were stunned. Analysts also said the bond action reflected fears that the turmoil in Greece would tear at the fabric of Europe’s financial system and create a crisis that could engulf the entire European Union, which together forms the world’s largest economy. (MSNBC)
Hmm. The only surprise to me is that so many smart people were surprised. Well, actually, I’m not even surprised at that anymore. I’ve seen so many millionaire CEOs do so many stupid things in the past two years that no level of stupidity seems capable of surprising me anymore. The froth at the top of the market two days ago went flat in a hurry as cold water came in over the transom. If the market had been up because the economy was really strengthening, as some opined in quotes shared here, it would not have fallen apart overnight on bad news from a single tiny country.
Overnight, we have gone from stock market euphoria to fear because of the Greek Crisis
As governing Socialist party lawmakers in Athens revolted and European leaders watched anxiously, the ripples reached Wall Street, where investors unloaded stocks and euros because of fear that the Greek turmoil would unleash protracted financial chaos across the globe.
Market reaction was brutal, particularly in Europe, with the Athens exchange down a massive 6.92 percent on worries the turmoil could bring down the government.
The backlash against Prime Minister George Papandreou’s risky gamble to announce a referendum was swift. The premier came under criticism from across Europe, within Greece and from his own Socialist party, which has been clinging to an ever-shrinking parliamentary majority. (WSJ)
The only surprise to me was that, the market’s global fall came so close to the end of October that its tardiness caused me to think my prediction of a second market crash was going to run aground as time was running out for my prediction to come true. Now, it looks like it may be the Greek Deal runs aground. So, my August prediction could still prove true.
That this was no small event is apparent from reactions at the highest levels:
European leaders react to Greek revolt in scorn
French lawmaker Christian Estrosi was even more direct: “It seems to me totally irresponsible on the part of the Greek prime minister…. I have the impression that a wind of panic is blowing on him and his party, and I want to tell the Greek government that when you are in a situation of crisis, and others want to help you, it is insulting to try to save your skin instead of assuming your responsibilities.”
…The main opposition conservatives called for Papandreou’s resignation. “In his attempt to save himself, Mr. Papandreou set a divisive, blackmailing dilemma that endangers our future and our position in Europe,” New Democracy party leader Antonis Samaras said. (WSJ)
“Another of our meetings has been hijacked by Greece because of Papandreou’s move to call a referendum,” a senior G-20 official said. “Everyone here agrees that Greece’s irresponsible decisions are causing a lot of turmoil around the world.” (WSJ)
“There is no doubt that the decision by Greece introduced an uncertain additional factor,” Kirill Dmitriev, head of the Russian Direct Investment Fund, said. “At a time of significant turbulence, additional uncertainty definitely doesn’t help.” (Businessweek)
This is not QUITE a market crash yet, but it has every promise of proving to be one as the outrage recounted all over the press (as quoted above) reflects. I’ll hold off on an outright claim that I was right in my prediction of when and how the next crash would happen until we see what the next few days bring. Does what began on Halloween, the last day of October, turn out to be the major problems from Europe that I said would result in a huge crash that would start in October? It’s too early to say if it reached that level, but certainly it has come very close as the quotes above clearly show the world believes things could take a very ugly turn very quickly at this point. I am equally open to saying this was a big drop in the market but not as big as I had predicted if things level out so that this goes no further. The next few days will tell whether another stroke of significant bad news puts the final nail in the global economy’s coffin.
For further reading on the Greek debt crisis:
The latest update on the Greek Debt Crisis as of the writing of this article can be found at
UPDATE: Greece Under Pressure to Hold Referendum As Soon As Possible (“A negative referendum could scupper the needed bailout tranche, forcing a default.”)