Greece Screws the World!

 Just when the world think that they have a few months of respite from the Euro crisis, our antagonist strikes again! With a twist worthy of a Hollywood movie, Greece has decided to pull out a fast one on the Euro community just days after a new bailout agreement has been hammered together. The Greece prime minister George Papandreou decided to call on a referendum in which Greek voters will either approve or reject, the latest Euro zone bailout plans. If the Greek citizens reject the vote, Geek will probably be forced to leave Euro and financial mayhem will prevail. We may well see a real double dip recession should that happen

The move blindsided European leaders who have worked for weeks to cobble the recent deal together. Global markets, especially those in the Eurozone dropped drastically on the news. The country that invented democracy is now asking the citizens to make the most important decision in their entire lives. Politically, Papandreou hopes to use this referendum to consolidate his political power and get a strong mandate by the citizens to see the country through this difficult time. He is also trying to hold the Eurozone hostage by using the referendum to bargain for a better bailout plan.

Essentially, Europe’s latest bailout plan, although has been a vast improvement since the last one, is still short of what is really needed. Just to recap on what the bailout consist of: A 50% reduction of Greece debt and a larger EU bailout fund to 1 trillion euros from 400 billion euros. According to some estimates, the writedowns of Greece’s sovereign debt should be much steeper. The reduction should be increased to 70 percent to make Greece’s debt burden bearable. On top of the, the Euro zone needs at least 3 trillion euros to ensure that Europe’s banks are well funded and at the same time, help out Italy should they need the funding. Most Greeks are unfavorable towards the latest bailout proposal as it comes with many strings attached. 58% of the citizens polled are negative against the Euro deal, creating a possibility that the Greek Referendum will fail. However, on the other hand, 70% of the Greek polled said that they want to keep the euro. Well, you get the picture. The Greek wants both their cake and ice-cream without suffering any from any health problems. Papandreou cunningly avoided stating an exact date for the referendum to take place, allowing the European leaders time to sweeten the deal.

From here, 2 scenario will happen:

1)      The Greeks voted yes. Papandreou will win the mandate to continue with the unpopular measures and weaken the power of the opposition parties. It might calm the street protests and unending strikes and bring some political stability to Greece. This will also calm global markets and bring stability throughout Europe.

2)      The Greeks  voted no. Greece will probably be kicked out of the Eurozone and reverts back to Drachma. The economy will be kicked back a decade but they can now default on their debts and have more flexibility in managing the economy. The Euro zone meanwhile will be thrown into turmoil and global economy may well dip into another recession. It will be an extremely painful process, but that will probably purge most of the excesses enjoyed by the western economy for the last decade.

The Market Did not React As Badly… As I Feared

When the news broke, I was expecting a massive sell-down in Asia this morning. Given that most European markets fell more than 4% and the USA market fell more than 2% overnight, I was prepared for the worst this morning. However, the good thing is that things did not play out as what I expected. Asian markets actually staged a massive rally on news that China may be considering loosening their economy given the headwinds faced by the global economy. The European markets are rallying as the time I am composing this newsletter. My consideration now is that we are back to square one, in the almost exact situation as before the bailout, should I take some profits off the table from Korea and BRIC funds in anticipation of the coming referendum. After today’s market action, it seems like I do not need to make a decision so soon as of now as the market seems to be calm despite the shocking news. I will probably observe market movement till the end of this week to make a decision. Meanwhile, the switch to America should still go on as the USD and American market is still a safe haven compared to European and Asian markets. Stay tuned!