Greece Gets Dealt Another Bad Hand

by: David Silver

The big news this week is that Greece received another bailout and that private debt placements will be forced to take a 54% haircut (above the 50% haircut from a deal back in October). So that should signal better days are ahead and that this whole mess is behind us, right? There is an article in the Wall Street Journal that outlines the deal. So even when this deal is expected to save Greece an additional 107 billion euros, on top of the savings from the other bailouts, debt as a percentage of gross domestic product is only expected to improve to 120.5% by 2020 (from more than 164% now). So the answer to the question that this is behind us is clearly an emphatic no.

I equated the recent announcement for Greece to a poker game. Greece right now is definitely the short stack at the table, and just won a hand. It's a shame that the country only got the big and small blinds. So Greece approved a deal, but is it really a good deal for them? Reading through the various news reports and the actual releases, I still don't think this is that good of a deal for Greece, and what is going to make this deal enforceable when the previous deals were rioted against?

One of the biggest fears was of a disorderly default (think another Lehman situation) and the hopes are that this deal keeps that potential off the table. However, I do not believe we are there yet. This plan is scheduled to reduce debt to GDP by 2020, which means there are another eight years of variables to account for. All of this also is based on the belief that the economy in Greece and other European countries will begin to improve.

The ten-year Greek note is still above 35% so this isn't a panacea for all of Greek's woes. The market in the United States initially traded higher following the deal, but eventually the truth of the situation came to light and the market started trading lower. Europe was already lower by the time the markets in the U.S. opened. The fact is, all the austerity measures are going to make a rebound in the Greek economy difficult. With the riots that continue to afflict Greece, it will continue to be hard to see a bump in tourism.

The Dow is approaching 13,000 again, and is up 12% year to date, while the Nasdaq is up more than 20% year to date. Investors in the U.S. are able to ignore Greece as it has been a problem for the past year. Also beneficial to the market is the fact that a disorderly default had already been priced in. So Greece is still a problem; Spain, Ireland, and Portugal are still a problem. Oil prices are on the rise and run the risk of derailing the economic turnaround in the U.S.

And yet, the market continues to rise and is in range of 13,000 for the first time since May of 2008. This isn't the all-clear signal, but investors continue to shrug off problems from around the world.

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