A Pummeled Greece asks for a Time Out - Markets React in Disgust

We are down to the final stages of negotiation with Greece and as more concessions are being made, things appear to be getting more personal... and also more impossible.

Greece is sweating under the gun as talks between troika (i.e. European Union, International Monetary Fund and the European Central Bank) and Prime Minister Lucas Papademos’s interim government were postponed until Tuesday in order to give the premier more time. Other European leaders, including French President Nicolas Sarkozy and German Chancellor Angela Merkel, also pressured Greece into finding an agreement sooner than later.

As a harsh reaction, U.S. and European markets bled red. The U.S. Dow dropped 0.13%, gold had lost as much as $26 per ounce at one point, the EURUSD pair fell 0.03% against the dollar and the Global Dow sank 0.02%.

More specifically, and optimistically, weeks of painful negotiations had seemed to bring Greek leaders towards an accord with creditors over the private sector involvement (PSI), a major part of their plan to restructure their debt. Actual terms have not been fully disclosed, but observers are expecting private sector creditors to take a 70% loss. With that out of the way, all that seemed to be left was an agreement on structural reforms. Sound simple enough?

It is in the arena of structural reform that a full and final conclusion has not yet been drawn. At the time of this writing (late afternoon on Monday, February 6, 2012), Greece has already okayed spending cuts equivalent to 1.5% of gross domestic product (somewhere in the vicinity of $3.9 billion) and the laying off of 150,000 public sector jobs by the end of 2015 (today, they already accepted a trim of 15,000 workers). However, troika would still like to see a cut in the country's minimum wage to the tune of 15-20% as well as the elimination of additional pay at Christmas, Easter and summer holidays - something Greece's leaders may NEVER agree to.

I suppose things have gotten quite personal and political at this juncture. Often times when two business associates are arguing, or a divorcing couple is splitting their possessions, you'll see both sides picking on the easier things first. For businesses and governments, offers for more peripheral items can be seen and with divorcing couples, less important items like the cappuccino machine or the costs-more-to-fix-than-its-actual value car are practically gift-wrapped. But when things get personal, when business associates discuss their split of a commission or divorcees begin to cover child custody or that vacation home in Paris, things get really ugly.

Personally, I think the chances of a final agreement being reached before Greece needs to roll over €2 billion ($2.63 billion) in debt this month and another €14.5 billion ($19 billion) by March 20, are between slim and none. Folks, it has become personal. Citizens of Greece might be able to stomach the concept of public sector jobs being cut and even spending cuts for amounts that are measured in percentages of GDP, which the average Greek might not even care to know about or define. But when you talk about a 15-20% minimum wage cut and threaten famous holidays, you are adding gallons of gasoline to a match.

And all this is assuming that the public workers will be okay with their job cuts - NOT likely given the fact that unions representing BOTH public and private sectors have threatened to hold a nationwide strike on Tuesday.

If Greece does not satisfy the “troika” of creditors in order to receive a 2nd bailout of 130 billion euros ($170.6 billion), then it is quite certain to miss a March debt repayment, which will place the country straight into default. Greece’s unemployment rate is already nearing 20% as the country undergoes its 5th year of recession and its economy is estimated to have contracted by over 6% in 2011. This steep contraction and missing previous fiscal targets has led to many speculators to believe that the new bailout plan may need to be boosted by around €15 billion. So even the currently proposed bailout might not be enough!

Now despite all of this hoopla and anxiety regarding Tuesday, you should probably know that tomorrow is not really the end all be all final deadline. February 13 is widely being viewed as the “last possible date” for Greece to tender its debt-swap proposal to private bondholders in order to complete the arrangement before March 20, according to Don Smith, an economist at ICAP in London.

Things are looking bleak in the Euro zone, my friends, but personally I think that the rest of the world isn't really rooting for or against this final agreement. I think that we simply want an END to a terrifying horror flick, no matter who the machete-wielding serial killer decides to behead. In other words, despite the suffering that other correlated markets are experiencing as a direct reaction to news from Greece, I think that a new beginning, even if it's not with a new Greece, will do worlds of good for all of the markets. To put it more succinctly, you just can't start building a new foundation until the annoying wrecking ball finishes its business and gets off of the property.

Ever so Watchful,

- Chris

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