November 1, 2011

As goes Greece, so goes the recovery.

Last week I recall telling a friend that the EU would not allow Greece to fail.  Sure, there would be strict austerity measures imposed.  Sure there would be massive protests in heavily subsidized, socialist Greece.  But in the end the countries in the European Union would be compelled to take a bit out of the crap sandwich that is the Greek bailout.  Sure enough it looked for a while that the deal was done.  For a while.  Today it looks like "not so fast".

The DJIA is down another 262 points today (as of 12:40 EST) after drop yesterday that followed a record October run up.  Why?  Because the deal seems to be falling apart;
“If you lost money in September and made some gains in October, it’s time to head for the hills and take your gains,” said Brian Battle, vice president of trading at Performance Trust Capital Partners, citing continued uncertainties ahead in the euro zone.

“Last week, we rallied on the plan that Europe had been figured out, but there was high execution risk,” said Battle. “Within four days, that’s falling apart with Greece holding a referendum. The weak link in the global financial architecture is the banking system—the health of the banking system is in question again.”

The announcement of a referendum in Greece shook global markets and led to heavy falls in euro zone banks. And Greek Prime Minister George Papandreou called for an emergency cabinet meeting at noon, according to a government official.
Couple that with the inevitable downward revision of the latest GDP growth number in the United States (from 2.5% to my guess is about 2% when the revision comes), means that the recovery is still on very shaky ground.  Even if the Greek deal goes through, it doesn't change the over-optimism of Wall Street.  The fundamentals are that Greece is still weak, other EU countries aren't too far behind, and the international economic recovery isn't as strong as we were led to believe it would be.

On the other hand if the Greek deal falls through, expect a rapid decline in the prospects of recovery around the world.

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