7 Things You Need to Know About the Crisis in Greece

Copyright Trine Juel/Flickr
Copyright Trine Juel/Flickr

With Greece nearly certain to default on a 1.6-billion-euro bond payment due June 30, the long-feared prospect of Hellenic financial chaos is just about here.

The nation’s banks closed this weekend, and the government imposed controls of the movement of capital in and out of the country. A Greek referendum is set for Sunday, in which voters will decide whether to accept more austerity or face the prospect of being booted from Europe’s currency union.

1. How bad is the problem? 

Greece owes foreign creditors about 280 billion euros, including $242.8 billion to public or quasi-public entities, such as the International Monetary Fund, the European Commission and European Central Bank. It doesn’t have the cash to make the interest payment due this week, and the failure to make a deal to restructure and refinance the obligation raises the prospect of an imminent default. The two sides are talking about an 18-billion-euro package to refinance some of that debt.

Greece’s private creditors took a write-down of about 75 percent on debt owed to them in 2012, but the public entities have resisted a similar move.

2. Why have talks broken down? 

The so-called Troika of the IMF, ECB and EC are looking for a combination of spending cuts (the most politically sensitive of which are to pensions that function as the Greek equivalent of Social Security) and tax increases. Greece’s top tax rate of 42 percent already applies to annual incomes as low as 42,000 euros. In addition, the nation has a value-added tax of as high as 23 percent, and Social Security taxes are also much higher than in the U.S. The country is already having huge problems collecting taxes it is owed. Greek Prime Minister Alexis Tsipras, pointing to the nation’s 25.6 percent unemployment rate, argues that Greece can’t handle more austerity.

3. What did the government do this weekend?

Greece’s anti-austerity Syriza party called for an election, hoping voters would back its push to get creditors to back down. It also imposed so-called capital controls to halt the flight of money out of the country and closed banks for a week.

While most domestic transactions are little affected, there is a daily cash-withdrawal limit of 60 euros, and international transactions are subject to approval. Greek banks had been reporting a sharp decrease in deposit balances since at least April, cutting into the banks’ ability to meet their own international obligations. Europe has also been helping Greek banks with a program called Emergency Liquidity Assistance, but Goldman Sachs economist Huw Pill said Sunday that the assistance could end early this week as the rest of Europe tries to cap its total exposure to Greece.

“Although the Greek government has repeatedly stressed that this is not a referendum on Greece’s euro membership, we believe that in practice it is,” IHS Global Insight economist Diego Iscaro wrote Monday. “In the event of a ‘no’ win, Greece’s euro zone membership will be seriously jeopardized. The creditors are unlikely to change their position markedly, and it would be impossible for the Greek government to accept the current proposal after being defeated by popular vote.”

4. How will the mess affect the markets in Europe and the U.S.?

European markets traded sharply lower on Monday, and the Dow Jones Industrial Average opened nearly 1 percent lower in New York. But the effect may be short-lived: S&P Capital IQ published a 70-year historical analysis of past market shocks that found events like this produce an average decline of 2.4 percent on the next trading day, which has been recovered in an average of 14 trading days.

“Greece represents less than 2 percent of the EU’s GDP,” S&P strategist Sam Stovall wrote. “By itself, its default or exit won’t upend the EU. … Yet if this drachma drama triggers a market decline in excess of 10 percent, not seen since October 2011, it may be a blessing in disguise. As history has shown, prior market shocks have usually proven to be better opportunities to buy than bail, primarily because the events did not dramatically alter the course of global economic growth.”

5. What happens if Greece leaves the euro or is forced to leave the euro?

Estimates of how little Greek drachmas may be worth are all over the place, from 340 to the U.S. dollar to as little as 1,000 drachmas to the dollar. Even before Greece is (or isn’t) forced to leave the currency union, there is talk of the government meeting its obligations in so-called “parallel currency,” whose value is highly uncertain.

6. Has the IMF’s austerity program worked so far?

No. Austerity has been the rule in Greece since the first debt-restructuring program was approved in 2010. But Greece’s unemployment rate has nearly tripled since, and annual gross domestic product has dropped 100 billion euros, or almost 30 percent. Greece’s slashed spending and tax hikes brought the nation’s “primary deficit,” or deficit before debt-service payments, into surplus territory in 2010. But the program was the equivalent of slamming on the economy’s brakes: Output dropped so rapidly that the primary deficit is now again 2 percent of Greek gross domestic product even with tough controls on spending. That’s not much different than the U.S., but the U.S deficit as a percentage of output is declining because the U.S. economy Is growing.

7. What does this mean for Greek tourism?

Uncertainty overshadows Greek tourism. And the stakes of not interrupting tourism are high indeed: Tourism accounts for 18 percent of the nation’s economy and employs a quarter of its workers, according to the Association of Greek Tourism Enterprises. Greece attracts as many as 17 million annual visitors, twice the nation’s population, and is virtually the only industry still growing in a nation where an estimated 59 businesses are closing each day.

But already, tourists are reporting difficulty getting cash, because automated teller machines are running out, and the threat of capital controls had some merchants unwilling to accept credit cards. Over time, leaving the euro and devaluing the drachma would lead to a period where Greek vacations should be very cheap for Western tourists.

How long that would last, and the impact it would have on hotels and other merchants, is hard to forecast. But resort owners are resisting creditor proposals to end or curtail their tax breaks for resorts on more remote islands and to raise the value-added tax on lodging.

Written by Tim Mullaney of CNBC

(Source: CNBC)

Dow Closes Higher for the Week as Overseas Worries Fade

© Provided by CNBC
© Provided by CNBC

Stocks closed more than 1 percent higher Friday, recovering from a sharp selloff earlier in the week, as hopes for resolution in Greece and stabilization in China boosted sentiment.

The Dow Jones industrial average closed about 220 points higher. The index surged more than 200 points in the open as the major averages leaped nearly 1 percent or more. The Nasdaq Composite briefly gained more than 1.5 percent. The Dow transports also gained more than 1.5 percent led by airlines.

Apple traded nearly 3 percent higher, reversing a 2 percent plunge Thursday that took the stock close to its 200-day moving average.

“This has been a week where everyone worried about China and Greece and as we go into the weekend those big financial headwinds are less scary,” said David Kelly, chief global strategist at JPMorgan Funds. “There’s clearly more optimism that a a Greece deal (is reached).”

Greece’s banks will need an estimated 10 to 14 billion euros of fresh capital to keep them afloat and more time before they reopen even if a deal is reached with European creditors on Sunday, a senior Greek banker told Reuters on Friday.

Greece submitted new reform proposals late Thursday that creditors could evaluate as early as Friday. The parliament in Athens is also scheduled to vote on the proposals later in the day ahead of Sunday meetings of euro zone leaders.

Chinese stocks extended gains on Friday, jumping for a second day following government intervention amid hopes of a Greece deal. European stocks also advanced, with the DAX closing nearly 3 percent higher.

In domestic news, Fed Chair Janet Yellen said in prepared remarks the U.S. is still on pace for a rate hike this year and that fundamentals are solid and sees pickup in growth in the coming years.

“It confirms our belief that it will be a small hike and later this year,” said Mariann Montagne, senior investment analyst at Gradient Investments. She expects a hike in November or December.

Yields extended morning gains with the U.S. 10-year note yield at 2.41 percent and the 2-year yield at 0.65 percent. German 10-year bund yields leaped to 0.89 percent.

Earlier, Boston Fed President Eric Rosengren said in a Reuters report that the central bank might hike rates later this year as long as inflation firms and Greece and other international wildcards do not get in the way. He added that negotiations over Greek debt and a slowing Chinese economy were among the possible disruptions that could delay the beginning of tighter U.S. monetary policy, though they hadn’t altered expectations yet.

The U.S. dollar fell about half a percent, with the euro above $1.11.

“The likelihood of a Grexit has dramatically diminished,” said Doug Cote, chief market strategist at Voya Investment Management. “Despite the volatility, despite the noise from Greece we’re having good fundamental data coming out in (U.S.) housing. … The fundamentals continue to drive this market forward.”

In economic reports, U.S. wholesale trade inventories for May jumped 0.8 percent, soundly topping estimates for the fastest pace of growth in six months. April’s figure was unchanged, showing a 0.4 percent gain.

There are no major earnings due on Friday.

Stocks rallied sharply in the open Thursday but gave back the majority of their gains to close mildly higher as lack of resolution on Greece kept investors on edge.

“We were very oversold so it’s very important that we rally next week,” said Lance Roberts, general partner of STA Wealth Management. He’s watching to see if the S&P 500 can hold 2,078.

He expects a rate hike in September unless the situation in China worsens.

“The one thing that trips up markets is the story no one is talking about,” he said.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell below 17.

“There are a lot of things that can go wrong and I think the level of the VIX, even though it’s come down, indicates we still have a lot of uncertainty,” said Randy Frederick, managing director trading and derivatives at Charles Schwab.

About four stocks advanced for every decliner on the New York Stock Exchange, with an exchange volume of 414 million and a composite volume of nearly 2 billion as of 2:30 p.m.

High-frequency trading accounted for 49 percent of July-to-date’s daily trading volume of about 7.0 billion shares, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.

Crude oil futures for August delivery settled down 4 cents at $52.74 a barrel on the New York Mercantile Exchange. Gold futures ended down $1.30 at $1,157.90 an ounce.

Gap reported a 1 percent drop in June same-store sales, more than the Thomson Reuters estimate for a 0.5 percent decline.

Barracuda Networks beat estimates by 1 cent with adjusted quarterly profit of 9 cents per share, with revenue also above estimates. However, gross billings—a sign of future demand—were well below Street forecasts.

Written by Evelyn Cheng of CNBC

(Source: MSN)