European markets open lower on Greek nerves

30 Jun 2015 | Author: | No comments yet »

Emerging markets ETF slides for fourth session on Greece jitters.

Markets sold off Monday after the Greek government surprised with plans for a Sunday referendum asking if Greece should accept what Prime Minister Alexis Tsipras has called “unbearable” loan terms.Vanguard FTSE Emerging Markets ETF fell for a fourth straight session on Monday as the possibility of Greece defaulting on its debt escalated after the country failed to secure an extension on its bailout package. Tourists walks trough the ancient Acropolis hill, with the ruins of the fifth century BC Parthenon temple on the background in Athens, Monday, June 29, 2015. (Daniel Ochoa de Olza, AP) As bad as the drop was in global stock markets Monday, the bulk of the financial pain resulting from Greece not sealing a deal with creditors and closing its banks is in Greece itself.

Yields on 10-year Greek government bonds surged to their highest levels since November of 2012, marking the biggest one-day yield increase in nearly a decade and a half, according to data from Tradeweb. Even though the Athens government shuttered its banks and stock market until after the debt-strapped country votes Sunday on whether to green light a bailout despite harsh austerity terms from creditors, investors dumped Greek-related investments that trade elsewhere. The drop reflected the likelihood that Greek shares are in a big world of hurt as its banks reel, its economy is in shamble and the country’s financial future is uncertain.

The next closest one-day move by order of magnitude was on March 7, 2012, when the 10-year bond surged 388 bps amidst the Greek debt swap to avoid default. Losses in the rest of the world were more muted, but still bad, with Europe’s Stoxx 50 index off 4.2%, London’s FTSE off 2.0% and Germany’s DAX down 3.6%. the Global X FTSE Portugal 20 ETF slid 77 cents, or 6.5%, to $11.07 and the iShares MSCI Spain Capped ETF fell $1.83, or 5.2%, to $33.50. See our free post, “Grexit: As Banks Deteriorate, Contagion Risk For Europe, Emerging Markets.” The euro flatlined at 1.12 against the U.S. dollar. The Greek 10-year bond yield spiked by 462 basis points, with the bid yield on the 10-year Greek bond closing at 15.429%, the highest yield since November 30, 2012.

Higher public spending promised by Greece’s far left government would only be possible if Greece converts to its own currency and begins printing it; if so, existing bank deposits would be compulsorily converted to a rapidly depreciating new Greek drachma, dramatically eroding the value of Greek citizens’ financial assets. Faced with this reality, Greek voters will likely act in accordance with the opinion polls that have long shown them to prefer staying in the E.U. and Eurozone to Grexit.” In just-published commentary, Barron’s Tom Donlan sums up the whopper of Greek debt and points out that the Greek economy has shrunk by 25% since 2010 despite its balanced budget today. Some of the borrowing has been turned around to repay older debt, for net obligations of nearly €250 billion.” See the Barron’s commentary, “Grease the Skids for Greece,” (subscription required) and our posts today on Greece including “3 Observers On Grexit, Euro Instability & Risk Contagion.”

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