Insights & Advice

|

It’s still all about Greece

It was just one of those weeks. Greece remained in the spotlight while U.S. macroeconomic data gave conflicting signals on the health of the economy. Despite that, some stock indexes made new highs, before falling back on some Friday profit-taking.european-flag-2-1367886-s

The Nasdaq Composite Index led the way. The tech-heavy index seems bound and determined to finally eclipse its old high made back in March, 2000. As such, the “NAS” continues to set multi-year intraday highs; the most recent one was Thursday’s high of 4,929. The index is up 4% year to date. It is only 4.1% from its all-time high of 5,132. It will get there.

As for the S&P 500 and the small-cap Russell 2000, both indexes set all-time highs of 2,102.13 and 1,230.50 this week. Only the Dow Industrials and Dow Transportations indexes have failed to make new highs. But as long as the weekly charts remain positive, they too should break out to new highs as well, so bank on it.

It appears that while Greece “has blinked first” in the European stalemate over the renegotiation of its bail-out agreement, the Germans are having none of it. Despite Greek willingness to now accept a six-month loan extension before the March 1 deadline, the Germans want Greece to explicitly agree to the continuation of the terms of their original bail-out deal. That becomes problematic, since the new Greek government was elected to specifically change the terms of that deal.

Remember the Germans were reluctant to bail out Greece in the first place. They demanded, as a condition of any new loans to Greece, that the country accept an air-tight commitment to implement an onerous austerity program, which would restore the country to economic health. Now the Greeks want to change the rules and the Germans are saying “Nein.”

A growing number of Northern European countries, with Germany at the forefront, are demanding an end to this Greek drama, even if it means Greece exits from the EU. Five years ago, that would have been unthinkable. When Greece’s problems first appeared, Germany’s banks had an enormous exposure to loans made to Greece, Italy, Portugal and Spain. How much? About $400 billion–equal to all the capital in the German banking system. Letting Greece go bankrupt would have meant an immediate melt-down of Germany’s financial system with a domino effect on the rest of the EU.

Today, not so much, thanks to the IMF and ECB. Those bodies have taken over many of those loans. Today, German banks have more than halved their exposure, to just 46% of their capital. It’s still a lot of money, but definitely manageable if there was a “Grexit.” But what we know, so do the players involved in the negotiations.

The trick will be to save face on both sides. Can an agreement be worded in such a way that satisfies the German’s demand for continued austerity, even if the reality evolves quite differently? Can Greek Prime Minister Alexis Tsipras, at the same time, show his voters a deal that does not appear to break election promises he made at the end of January? It may all come down to semantics.

Who says finance isn’t exciting? I would put this drama right up there with some of the best shows on television. But as far as any real impact on your portfolios, don’t sweat it. Regardless of outcome, your portfolios should continue to do well in the months ahead.

Posted in A Few Dollars More, At the Market