U.S. stocks logged their worst one-day decline this year Tuesday, as the Dow gave up more than 200 points for the first time since before Thanksgiving. The downward move was thanks to fears of a “disorderly Greek bond default.”
But come on. Is that really news to anyone?
The fact that the stock market had put the eurozone debt crisis on the backburner never changed the fact that this issue wasn’t going away. The headline that many news outlets hung on Tuesday was the fact that the Institute of International Finance warned recently that a disorderly default could cause more than $1.3 trillion in economic “damage.”
But whether it’s $3 trillon or $1.3 trillion is kind of academic. Did anyone really think the cost of a Greek debt default would be small? By nature, a “disorderly default” is a bad thing. If you needed IIF to quantify that, you’re in over your head.
Another point of interest Tuesday was that Greece is optimistic that it will achieve a 75%-80% participation in a bond swap negotiated by IIF — but it needs closer to 90% for the deal to work. Investors who loaned cash to the Greek government via bonds have until Thursday night to sign up to the debt deal, which aims to wipe about $140 billion in obligations away by paying just 53.5% of face value, allowing longer repayment schedules and lower interest rates.
That’s quite a haircut. So even the best-case scenario here has serious consequences.
What remains baffling, however, isn’t the fact that Wall Street responded negatively to the news on Tuesday — but rather that it took so long.
Just take the revised look at Q4 GDP for the eurozone released this week, showing a 0.3% decline in economic activity to close 2011. Europe has been struggling for a while, and those who have been paying attention should already have figured this out.
So what comes next? Well, the bureaucratic machinations continue as Greek looks to unwind what debt it can and restructure its bonds to buy some more time. Some folks remained unconvinced and will remain on the edge of their seat as the Thursday deadline approaches — and you can be sure even after Greece passes that, there always is the next round of nonsense to look forward to regardless of the outcome.
After all, the next bond repayment valued at $19 billion (that’s 14.5 billion euros) comes due March 20, so there is plenty more time for handwringing between now and then.
Remember, Prime Minister George Papandreou first sealed a deal with the EU and IMF in May 2010. The leader agreed to a bailout in exchange for budget cuts that were meant to avert default — and look how that worked out! That move almost two years ago was the first rescue of a eurozone member in history, but now seems like ancient history considering all the other news of imminent default or assurances of lasting stability.
Just about the only thing you can be sure of is that however this week’s dealings end, we haven’t heard the last of eurozone debt fears.
Don’t read too much into the steep declines Tuesday. They were long overdue since the market has been largely ignoring the very serious issues in Europe. The market likely has some more trouble ahead of it if, too, based on bearish indicators as of late.
Market volatility is on the rise. Small caps significantly underperformed in February, with the Russell 2000 up only around 2% compared to 4% for the S&P 500 on the month. That’s historically bad news, since smaller companies are the canary in the coal mine. Emerging markets continue to hit headwinds, whether it be this week’s disappointing GDP report from Brazil or the string of bad news from China indicating the Year of the Dragon could be the Year of the Draggin’ in the region.
In short, there is no shortage of bad news. Investors just seemed to forget about it as they were busy bidding Apple (NASDAQ:AAPL
) up to above $500 and speculating over the glorious Facebook IPO.
If you want to look to the future, you should think twice before signaling the “all clear” on your portfolio and believing that the fragile recovery will last. The bottom line is that serious concerns remain for the global economy — and those haven’t gone away despite the recent rally. This is true on many fronts, but especially regarding the European debt crisis.
Nobody knows whether Greece can ultimately avoid default, simply dying a death by a thousand cuts as the sordid affair continues to drag on for many more months.
As I said back in January, there are only three ways the eurozone debt crisis can end:
- The eurozone falls apart.
- The eurozone kicks out ailing members and relaunches as a smaller but stronger coalition.
- The status quo persists via bailouts and austerity.
Right now, all three remain very real possibilities. That means uncertainty will continue to reign — and we could be in store for more dark days like Tuesday when the headlines bring the severity of the situation back into the spotlight.
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Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
