Global stocks tumbled Monday after Greece closed its banks and limited the amount of money citizens can withdraw from them after bailout talks with its creditors broke down over the weekend. The Greek drama has been unfolding for many months (if not years) but the latest developments revived fears the country could exit the euro zone, with unpredictable consequences.
The Dow fell nearly 350 points, or 1.9%, while the S&P 500 lost 2.1% and the Nasdaq tumbled 2.4%. European stocks suffered their biggest drop in eight months with Germany's DAX and France's CAC each falling about 3.5% while major bourses in Spain and Italy fell more than 4.5%. The stock market in Greece was closed but the FTSE Greece 20 ETF, a U.S.-based proxy for Greek equities, fell 19%. Meanwhile, so-called safe haven assets like U.S. Treasuries, Germany bunds and gold rallied.
Whether the selling resumes Tuesday remains to be seen, of course, but investors have a few more days to think about what a 'Grexit' would mean ahead of Sunday's referendum wherein Greek citizens will decide whether or not to accept conditions for another bailout.
"We’ll see if the Greek people in response to the chaos that is now taking place will vote yes on the referendum instead of having its new Marxist government take them over the cliff on the platform that the private sector should exist to finance a bloated public sector with very generous benefits," writes Peter Boockvar, chief market analyst at The Lindsey Group. "That said, a debt write down is an inevitable component of what is a needed restructuring and a no vote (if they can someone stay in the euro after) would quicken that likelihood. On the other hand, if the referendum is essentially a vote on whether to stay in the euro or not (which it seems it will be), a yes vote must take place for the sake of the Greek people. A debt restructuring will then happen eventually anyway."
In addition to the Greek news, Puerto Rican Gov. Alejandro Garcia Padilla put additional pressure on stocks by telling The New York Times the island's debt was “not payable,” raising the specter of default across the Atlantic as well. Puerto Rico has approximately $72 billion in outstanding debt which has been popular with U.S. municipal bond investors because it's free of all federal and state taxes; top institutional holders of Puerto Rican bonds include OppenheimerFunds, Franklin Resources, Lord Abbett and Nuveen, Bloomberg reported last month.
But there's no such thing as a free lunch, as the saying goes; Monday afternoon, the White House said no federal bailout of the U.S. territory will be forthcoming and Puerto Rico cannot declare bankruptcy, as Detroit and other municipalities have done, unless Congress acts to change the law.
David Kotok, chief investment officer at Cumberland Advisors which has $2.4 billion of assets under management, says Governor Padilla may be borrowing a page from Greece Finance Minister Yanis Varoufakis, who is an expert in game theory.
"When you play game theory...it's a game of chicken," Kotok tells me in the accompanying video. "When you play chicken you need to be the last one in the game. That means it isn't until the eleventh hour, the 59th minute and 59th second before someone turns. We'll see."
Bill Witherell, Cumberland's chief global economist, agrees "the most likely outcome will be a last-minute deal, unsatisfactory for both sides, that again kicks the can down the road, avoiding 'Grexit'. That said, the possibility of a truly dire end to this Greek tragedy has significantly increased."
Coincidentally, the 'eleventh hour' for both Greece and Puerto Rico occurs on Tuesday when the former has a nearly $8 billion loan payment due to the International Monetary Fund and the latter has to approve a budget for the fiscal year starting July 1 when it also faces a $655 million payment on its general obligation bonds. (Gov. Padilla was slated to discuss Puerto Rico's budget and related debt woes in a televised address Monday evening.)
Kotok expects the market will become "rocky" and more volatile as these double debt issues play out this week, but remains bullish on stocks, as has been the case for some time.
"As long as we still have zero interest rates, asset prices rice," he says."The upward trend [remains] intact until interest rates normalize. That hasn't happened yet and Greece says it won't happen for a while."
Indeed, fed fund futures markets on Monday showed investors are now betting the Fed will hold off raising rates until 2016, based in part because of the central bank's concerns over events in Greece. That's one bright spot for stock investors and a key reason why Monday's selloff wasn't even worse.
- For more on the Greek tragedy, check out Mark Dow's Behavioral Macro blog. "When I look at Grexit I see a world in much better fundamental position to avoid the cascading systemic contagion we (rightly) feared as recently as a year ago," he writes. "Now is the time to do what the system could not handle in 2010: get Greece off the toxic medication and onto a path of growth and dignity."
- Regarding Puerto Rico, American Enterprise Institute columnist and blogger James Pethokoukis notes the island's debt-to-GDP ratio is about the same as America's overall. "So why isn’t Washington having a debt problem, too?," he asks.
Editor's Note: An earlier version of this story incorrectly stated the date of the referendum in Greece. It is Sunday, not Saturday. The story has been updated.