Dollars and Sense: Markets brace for Greek impact

No fed action—for now. The Federal Reserve met on Tuesday and Wednesday and decided that even though the economy is getting better, it’s still too early to raise interest rates. What about July or August? I don’t make predictions. But predicting the Fed’s behavior is a cottage industry, and I can say that others believe the rate hike won’t come until September. A survey of economists by Reuters said a small majority of those queried believe we’ll see a rate hike in September, and one more by the end of the year.

Greek drama continues. The second big news item of last week was Greece. The debt-ridden European nation was supposed to pay back a big chunk of money to its creditors at the beginning of June, but it didn’t have the money. So, it exercised an option to not make that payment so long as it made a bigger payment—about $1.8 billion—by the end of this month. Now, it looks like it still doesn’t have the money. So it’s been trying to re-negotiate, which hasn’t gone well. The Greeks’ position seems to be that the eurozone leaders are unwilling to kick them out of the European Union. For most of the past year that would have been a good bet. The euro has been very weak, and countries such as Great Britain have taken a more conservative turn, with some asking why England and other eurozone countries have yielded so much national sovereignty to European leaders. With all that, a Greek exit might have been too great a blow for the European Union (EU) to bear. But the euro has rebounded a bit, and—to prove that tone and temperament really do matter in these negotiations—eurozone leaders have grown tired of what many have perceived as the arrogance of the Greek negotiators and political leaders. Some of them are now saying Greece is welcome to leave and fend for itself.

Impact of a Greek departure. The markets have gyrated as Greece has been in and out of the news. But will a Greek default or departure from the eurozone really make a big difference? It will signal a new era for the eurozone. A couple of summers ago, Greece wasn’t the only eurozone country in trouble. Portugal, Ireland, and Spain were also having major financial difficulties. With Greece, the names of those countries formed the acronym PIGS. It was a fitting acronym, in some ways, because these countries had become pigs. They had gotten fat and lazy, economically speaking. Spain’s unemployment topped 25 percent. But the eurozone imposed several austerity measures on them and they complied. Their improvement has been a big reason for the eurozone rebound. If the EU goes soft on Greece, the other PIGS countries are going to be unhappy. They’re going to wonder why they went through the pain they went through. Of course, if the EU and the International Monetary Fund, Greece’s main creditor, stay strong, Greece might indeed leave. That, too, will be a real test for the EU. This is a defining moment for the EU, no matter what happens.

The week ahead. Most analysts—and business reporters—will continue to keep an eye on the situation in Greece. Here at home, we get a good many government reports this week. Existing home sales comes out today. That report doesn’t usually move the market much, but we did get a report last week that U.S. homebuilder sentiment rose more than expected this month, hitting the highest level since September. Tomorrow’s durable goods report often does move the markets. On Thursday, we get a report called Personal Income and Consumption, which comes out every month and usually doesn’t cause much of a stir. But I think this month, with everyone looking for signs of inflation as well as wage growth, this report will get a bit of additional scrutiny.

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