Fate of markets rests on Greece’s shoulders

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Simon AverY
Globe and Mail Update
Published Monday, Jun. 27, 2011 5:52AM EDT
Last updated Monday, Jun. 27, 2011 6:51AM EDT

If stocks are to find firmer footing this week, investors are going to have to hear some supportive news from Athens.

Number 39 in the world’s GDP rankings, Greece has become the number one concern for the market as the Hellenic republic teeters on the brink of insolvency.

“It’s all about Greece,” says Paul Larson, an equity strategist with Morningstar Inc. in Chicago. “Greece is not sustainable in its current form.”

A few months ago, the country’s sovereign debt crisis had slipped into the background and investors assumed a rescue plan would fall into place. It’s a different story today. Even though the country’s debt is small enough that it can be “reasonably absorbed,” the bigger issue of contagion looms, Mr. Larson says.

The greatest fear is that Greece could turn into the next Lehman Brothers, whose collapse in September 2008 triggered the market meltdown. Banks could be pulled down and other European Union countries laden with debt could default next, effectively transforming Greece’s budget failings into a full-blown global crisis.

Last Thursday, EU leaders committed to give Greece more money on the condition that the country’s parliament finalize an austerity plan. This week, markets will be watching whether the Greek government, which narrowly survived a confidence vote, can actually get the austerity package through parliament.

Greek Prime Minister George Papandreou commands a slim majority, and with some members of his own government critical of the program, it’s by no means certain the bill will pass. But with the European Central Bank dead set against any restructuring of Greece’s debt, which would require bondholders to share some of the pain, economists and officials are optimistic the latest bailout funds will eventually be forthcoming.

"The sense of national responsibility will preside in the parliament vote," Mr. Papandreou told reporters in Brussels on Friday.

Both the Bank of Canada’s Financial System Review and the Bank of England’s Financial Stability Report say that Europe’s sovereign debt crisis is the most prominent risk to their financial systems, notes Benjamin Reitzes, an economist at BMO Nesbitt Burns Inc.

“Indeed, the global nature of finance means that nearly every major country is exposed to one another. Even if direct exposure is minimal, secondary exposure is where the risks are,” he wrote in a report Friday. But Mr. Reitzes is confident a solution will emerge and Greece will move out of the headlines by mid-July.

It’s not just the lack of leadership from European politicians that is spooking the markets. U.S. representatives need to reach an agreement by early August for raising the national debt limit or the country could face the unthinkable: a default on its $14.3-trillion (U.S.) debt.

Talks fell apart last Thursday when Republicans walked out over Democrats’ demands for tax increases as part of a deficit reduction plan. The politicians have until Aug. 2 to reach an agreement.

Meanwhile, key economic data due this week are not expected to inspire the market. On Tuesday, the U.S. Conference Board releases its consumer confidence survey for June. The measure tumbled in May and remains far off its long-time average of 93 points. But economists are expecting a modest improvement to 61.5, up from 60.8, thanks to lower gasoline prices, which have shed 8 per cent since their recent high in May.

On Friday the ISM manufacturing composite index is expected to post a further decline for June to 51.5, following a surprise drop in May of 7 points. That figure is still within the parameters of what represents an expanding economy, but is a sure sign that momentum is escaping from the U.S. manufacturing sector.