IMF Kills Aid To Greece: A Greek Default Is Europe's Day Of Reckoning

Includes: ERO, FXE
by: Skyler Greene

The Headline

The International Monetary Fund will stop paying further rescue aid to Greece, making the country's insolvency in September more likely. - Bloomberg

What It Means For Investors

While a Greek default isn't guaranteed (the ECB could step in with aid in the interim), a default would likely mean Greece would finally exit the euro.

Such a move would in fact be a net positive for the euro, though it might cause some chaos in the short term. The consensus opinion among esteemed economists is that a Greek exit would strengthen the euro versus the dollar as the remaining eurozone countries would be economically stronger than Greece.

While Greece's exit from the euro might shock markets in the short term, it would hardly classify as a "black swan" event. After all, a Greek exit has been predicted for years, which is why German Economy Minister Philipp Roesler recently stated a Greek exit from the eurozone has "long since lost its horror."

Both the European Central Bank (ECB) and the European Commission have been working on Greek exit plans. Similarly, corporations have been preparing for the possibility, examining "cash, treasury, and currency issues" related to a switch to a new iteration of the Greek drachma.

Indeed, global markets would likely be benefited, in the long term, by a resolution of the European sovereign debt crisis. The constant stream of negative headlines is weighing on the market, despite strong US equity fundamentals and fairly strong earnings. A Greek exit might spark a short-term sell-off, but resolution would be just as much a positive for the markets as for the euro itself.

Despite the positive outlook for the long term, in the short term, investors should be cautious and keep dry powder handy. Based on the performance of the markets last September, when Greece default fears were high, an actual Greek default might be accompanied by a few weeks of selling. But investors who stuck through—or bought at the bottom—were rewarded with a strong rally.

With many major companies set to report earnings, this week was already looking pretty headline-heavy. Now, with Greece set to lose aid from the IMF, earnings may be swallowed up by paranoia about Europe.

Prepare for a noisy week.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.