Greek Drama

It looks like the Greeks just voted to stay in the Euro. What does this mean?

In the short-run, this eases fears of an imminent rupture within the Euro zone, where Greece could be the first of a number of indebted countries departing the common-currency area. The fear is that a Greek exit would trigger financial contagion that might threaten financial institutions around the world.

Those fears have been allayed for the moment. By itself the vote doesn’t solve Greece’s problems, but it does represent a victory for rational finance: in the aggregate voters seem to understand that there is no free lunch—bills need to be paid, debts need to be honored, and you can’t just sprinkle pixie dust over a financial crisis and declare that it’s over.

But after a brief rally, markets have settled back. All eyes are now on Germany, whether they might be willing to accept some concessions in Greece’s fiscal adjustment program, especially in the pace of budget cuts required of the government. All eyes are also on Spain, which had its debt rating cut recently to BBB, the lowest level that is still considered investment-grade. Spanish yields have soared recently to over 7%.

But this is how the world grows: not with a bang but with a series of pops. The US market is near the top of its 12-month range, and most European markets are in the middle of their ranges. Bull markets climb a wall of worry, and Europe has given them plenty to worry about. Let’s hope they can keep climbing.

Douglas R. Tengdin, CFA
Chief Investment Officer
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