Market Brief: A Done Deal…Again.
In a last minute deal, European Finance Ministers and the International Monetary Fund (IMF) agreed to give Greece another round of bailout loans aimed at avoiding what would have likely been a default in March. The bailout total is about $170 billion, a heavy price to pay to bail out a country of less than 12 million people, some of whom pay their taxes. To be sure, the tab being paid on the streets of Greece is large as well.
So, Greece doesn’t default in March, and the country pushes further onward down the path of austerity. Now what? Well, now Greece has until 2020 to bring its debt-to-GDP ratio down to “only” 120.5%. It had most recently been about 160% and rising. Of course, between now and 2020, Greece needs to find a way to grow its economy while cutting government expenditures and obligations.
On the obligations side, there will be a “voluntary” reduction in principal on existing Greek bonds that are held by financial institutions. Greek bonds held by the European Central Bank will not reduce principal, but the ECB will forego profits on the bonds. In theory, this should decrease Greece’s current debt load. If, however, the austerity measures are so severe that they cause further contraction in Greece’s economy, the bailout programs may not have the desired effects.
They will likely accomplish one important thing. They will buy more time, and while it’s hard to measure, sometimes time can heal wounds. Time can also give the Europeans some wiggle room in shoring up bank and other sovereign balance sheets. Some uncertainty has been taken off of the table, so investors can focus on other, more fundamental, things.
Speaking of markets, the rally that started in October of last year continued. As the old market saying goes, “Markets climb a wall of worry.” That has been the case since October of last year-or since March 2009 for that matter-as investors have had plenty to worry about (e.g. U.S. budget stalemate, debt downgrade, Japanese tragedy, ongoing wars, Euro zone crisis, North Korea, Iran…well, you get the point.).
The S&P 500 closed last week up over 8% so far for the year and over 24% since the 2011 low mark of about 1,100 set on October 3. That’s quite a rally in a short span of time, so at some point, investors should expect that some of the advances should eventually be given back. Given the better macroeconomic news of late, we suspect that most declines will be somewhat muted.
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Evan S. Russell, CFP®, Stacy L. Rerick, CFP®, Ronald E. Wilkinson, CFP®