Greece Says "Oxi" (No) to European Austerity; So What Happens Now?

Market Roundup Dow -46.53 to 17,683.58 S&P -8.02 to 2,068.76 NASDAQ -17.48 to 4,991.73 10-YR Yield -0.115 to 2.278% Gold +$4.70 to $1,168.20 Oil -$4.07 to $52.85 Oxi. No. That was the result of yesterday’s referendum in Greece, which officially just referred to Europe’s most recent bailout proposal. But unofficially, the resounding “No” refers to so much more. Germany’s “Austerity First” approach. Five years of deepening economic recession. Membership in the euro currency itself. It’s no surprise, then, that markets worldwide got blasted overnight and earlier today. Dow futures plunged by more than 200 points (before recovering to down 50-ish by the close) … the euro currency and interest rates tumbled … and commodities got spanked across the board. So the most important, logical question is: “What happens now?” Here are my answers: First, the leaders of France and Germany met today in Paris to discuss where to go next and to come up with a unified negotiating position. That meeting preceded an emergency summit of all European leaders tomorrow. In advance of that gathering, German Chancellor Angela Merkel has basically told Greek Prime Minister Alexis Tsipras: “Your move” – saying it’s up to him to offer a new debt-relief proposal. Second, in Greece, the combative finance minister Yanis Varoufakis resigned – broomed by Tsipras for being too combative. Will Greece stop using the euro? Banks are rapidly running out of cash, with some ATMs reportedly dispensing even fewer or no euro notes at all. That’s because the Greek banking system went into the weekend with a cushion of only 1 billion euros – and the European Central Bank refused to increase the amount of emergency aid it will provide again today. So it comes as little surprise that the existing program of capital controls and the ongoing bank holiday has been extended for even longer – through at least Wednesday (and likely much longer!). Pharmacies are running short of medicine, and worries are growing that tourists will start shunning Greece in greater numbers. That would cut off one last major source of foreign money the Greece has been relying on. Third, Greece’s financial situation is worsening by the day. Analysts estimate any new bailout program may need to be $20 billion to $30 billion larger now than it would have been a few months ago, given the further deterioration in the economy and banking sector. European power brokers don’t want to concede and give Athens the massive debt write-offs it wants out of fear that will only encourage other indebted nations to demand the same thing. But if they keep dithering and fail to stem the bleeding soon, the costs of a fresh deal will keep spiraling higher. After all, as the Wall Street Journal notes … “As the euro shortage drags on, the government in Athens likely will be unable to pay its external creditors. Ordinary Greeks won’t pay taxes, rent or credit-card bills to keep the euros they have. The government will be forced to pay its internal obligations through scrip — in effect, checks promising a future payment in euros.” “European power brokers don’t want to concede.” That last point is the most important. The vote significantly increases the chance of a Grexit from the euro currency union. The country already missed a 1.6 billion euro debt payment to the International Monetary Fund, and it owes the ECB 3.5 billion euros on July 20. There’s no way in you-know-where Greece can pay that, at least not in full face value euros. So it may need to start issuing massive amounts of IOUs, roll out a new parallel currency, or re-denominate its debts in a new drachma currency. We keep being told by the powers-that-be in Europe not to worry about that event. They say the losses will largely be borne by public institutions like the ECB and European governments rather than private banks and investors, cushioning the blow. But isn’t that kind of like how former Federal Reserve Chairman Ben Bernanke told us the subprime crisis was “well-contained”? We all know how that wonderful advice worked out. Bottom line: I’ve been paring down some risk and raising cash for a little while now, thanks to the increased risk of significant market turmoil. We’re trading at key levels in many markets, and depending on whether those levels hold or fold, it may be time to raise even more. In the meantime, stick with super-cheap stocks and stocks in sectors and markets that either A) have nothing to do with Greece or B) should actually benefit from capital flight away from troubled countries and toward stronger ones! Source: Mike Larson moneyandmarkets