Expect Volatility as Greek Debt Drama Escalates

Advertisement

Within 48 hours late last week, global markets went from believing a new bailout deal for Greece was imminent (on reports Germany was willing to accept a piecemeal deal) to fearing outright default (after talks in Brussels broke down on Thursday night).

greek greece flag 630

The fluid situation, which could result in Greece defaulting on its debt to international lenders and possibly leaving the eurozone, will likely lead to increased volatility in the stock market.

The situation remains dynamic, but here’s where things stand now:

Athens is running short of cash as it requests local government transfer all available cash to the central bank. While a $1.8 billion payment to the International Monetary Fund at the end of the month is the center of focus (itself a “bundle” of payments due earlier this month, something never done by a developed country before) the chatter is that the first sign of stress will be missed payments to workers and pensioners.

Reuters is reporting that European officials have held their first formal talks on the possibility of a Greek default, including the need for debt writedowns and capital controls. This as hopes dim for a new deal to release $8.1 billion in rescue funds under the current assistance program that was extended for four months back in February.

The upcoming meeting of Eurogroup finance ministers in Luxembourg on Thursday is seen as the last best chance of securing an agreement to release funds to Athens in order to make the June 30 payment deadline.

Both sides appear to be hardening their positions, with German politicians rallying behind their hard-line finance minister while Greek Prime Minister Alexis Tsipras proclaimed optimism at an open-air concert as anti-bailout protestors once again take to the streets.

Last week, European Commission President Jean-Claude Junker invited Tsipras into a meeting room he described as the “torture room.”

Tsipras seems unfazed; almost delighting in the fact that financial markets are pressuring the European establishment to come to a compromise in a way that hasn’t been seen since his party came to power and started this long standoff. The open-air concert was in celebration of the reopening of a state-run TV station closed two years ago under cuts ordered by the European Union and the IMF.

Before, markets attacked Greece while leaving the rest of the Eurozone alone, pushing down Greek bank stocks and Greek bond prices. But now, contagion is spreading pushing down Spanish bond prices, for instance.

Derek Halpenny from the Bank of Tokyo-MItsubishi told Reuters “We are getting close to … this take-it-or-leave-it scenario” where Greece’s creditors make one final offer.

President Francois Hollande of France said Monday that there is “little time” to prevent Greece from leaving the eurozone.

Alberto Gallo at RBS believes the odds still favor a last minute compromise by Tsipras, who’s been watching his approval rating drop as Greeks clamor for a deal. There are wrinkles, such as whether compromise would result in the loss of support of the hard-left members of his coalition government. Societe Generale is looking for discussions to continue to the very last minute with a deal possible at the EU Summit on June 25 and 26.

Investors should prepare for a rise in volatility as an issue that’s been simmering for years seems to be nearing a resolution. Trimming vulnerable positions and raising some cash especially any that are directly exposed to Europe and the euro.

This mirrors action being taken by European officials: On Monday it was reported that eurozone countries have come to an agreement over an emergency plan for a Greek debt default, including the imposition of capital controls. Stocks haven’t suffered a 10%+ correction since early 2012 — a historic run of low volatility gains. A Greek default could be just the thing to encourage some panic selling.

If that happens, it will prove eerily similar to the panic over the Russian bond default in 1998 (that came on the heels of the Asian currency crisis): A temporary tumult that causes a lot of consternation but proves to be a buying opportunity.

I’ll be on the lookout for deals on stocks in hot-growth areas like Internet of Things, mobile communication, autonomous transportation and biotech.

Research: Anthony Mirhaydari

Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Check out his Top Stock for 2015 here.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/06/expect-volatility-as-greek-debt-drama-escalates/.

©2024 InvestorPlace Media, LLC