Exactly three years from the 2008-2009 bear market bottom, US jobs and Greek debt were once again the major plotlines for the week. Greece was able to complete the largest sovereign restructuring in history, saddling private investors with significant losses and opening the door to more aid from Europe and the IMF. The Euro fell. The US economy continued to add jobs at a faster pace than expected. Daily volatility increased, but stocks and bonds were little changed for the week.
S&P 500: 1,371 (+0.4%)
MSCI EAFE: -1.6%
US 10 Year Treasury Yield: 2.02% (+0.04%)
Gold: $1,713 (-3.3%)
USD/EUR: $1.311 (-2.6%)
- Monday – China reduced its economic growth target to 7.5%.
- Tuesday – Euro area GDP fell 0.3% in the fourth quarter, largely matching expectations.
- Tuesday – Israeli Prime Minister Netanyahu addressed US congress, pitching the case for more aggressive action to stop Iran’s nuclear program.
- Wednesday – Apple unveiled the iPad 3.
- Wednesday – The Fed discussed a new sterilized bond buying program, but did not indicate whether it was likely to utilize the strategy.
- Thursday – German industrial output for January rose 1.6%, ahead of expectations.
- Friday – Euro area leaders freed 35.5 billion euros of aid for Greece and backed the country’s debt swap with creditors.
- Friday – ISDA ruled that Greece’s forced use of collective action clauses constitutes a credit event and triggers $3 billion of default swaps.
Sometimes, perception is reality. It is interesting when a tiny economy like Greece has a huge impact on global financial markets. The reason is not Greece itself, but a view that Greece is a proxy for other sovereign debt. If so, we now have some clarity. Original private holders of Greek debt lost about 70%. Many never imagined this was possible, but Greece wasn’t the first country to default and it won’t be the last. This week’s successful reorganization of Greek debt avoids a lot of problems, but it is hard to call it a victory.
Unfortunately, even with a 100 billion euro debt reduction, the country remains effectively insolvent. We will most likely go through the whole process again in a few years. But for now, focus will shift to other areas. Will it be the precarious balance sheets in Portugal, Italy and Spain – or the promising signs of growth in the US and attractive equity prices?
No other country faces problems as severe as Greece, but there are several which aren’t exactly healthy. After seeing huge losses in Greece, rational bond investors may demand higher rates for sovereign debt. Perhaps luckily, investors are not always rational. And a few years of global economic growth could do a lot to improve reality.