Who Will Blink First?

By Jonathan Scheid
 26-Jun-1519-Jun-15Weekly% ChangeYTD% Change12 month %Change
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10 Year U. S. Treasury Yield 2.47%2.26%9.29%NANA
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After months of negotiations over how to refinance Greece’s financial bailout, both sides have resorted to extreme negotiation tactics. Greece is running out of money and it owes the International Monetary Fund 1.6 billion euros this week. If it pays the IMF, they have no money to run their government. If they don’t pay the IMF, they will be the first advanced economy to default on an IMF loan.

The European Commission, European Central Bank and International Monetary Fund have been working with Greece on implementing a number of tax increases and cost reductions in exchange for new loans. Over the weekend, European leaders gave Greece take-it-or-leave terms for additional money to run its government and pay some of the loans that are due.

Instead of the Greek government approving the deal, they decided to let the people vote on the matter. The vote is currently scheduled for Sunday, July 5. Greek citizens will either vote to approve the bailout or not approve it. Many are considering this a vote for Greece to stay in the euro currency.

From an outside perspective, both sides seem interested in working out the Greece situation to a positive outcome. According to recent polls, Greece wants to stay part of the euro currency union. The rest of the euro currency union countries would like to avoid a country leaving the euro currency because it could be a pattern that other troubled nations follow and it calls into question the future of the currency.

If Greece wasn’t part of the euro, it would most likely devalue its way out of debt. Either way, the citizens in Greece are the ones in real trouble. Youth unemployment is at 50%, economic growth is stagnant and their way of life is going to change one way or another. In fact, change is truly needed because their economic policies and leadership have not been moving the country forward.

Greek citizens are in for a tough week. Their banks and stock markets are closed. To avoid a bank run, Greek citizens are only allowed to withdraw 60 euros a day. (If Greece leaves the euro currency and returns to the drachma, the value of the drachma will be very low, so people are trying to physically hold as many euros as possible.) World stock markets reacted negatively to the news of the referendum since they felt that a deal would get worked out at the last minute.

A deal could potentially still get worked out at the last minute, but at this point the odds are exceptionally low. Both sides are fairly dug into their positions and feel that they each have the upper hand. We’ll see if this brinksmanship and political positioning is all worth it if and when the people of Greece will have a chance to be heard in the referendum.

Coming Up: While U.S. stock markets reacted negatively to the news, the economic and financial impact to the U.S. and our companies is quite limited. The uncertainty of the euro currency is really what is causing the volatility. Like the countless other events, this too will pass and investors will focus on how well companies are doing. (On that topic, S&P 500 companies posted record dividends in the second quarter paying out $94.6 billion in regular dividends. That is up 9.5% from a year ago.)

The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Jonathan Scheid, Chief Investment Officer, Bellatore Financial, Inc.

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