Greece: Why Is a Nation of 11 Million Causing Stock Market Losses Around the World Today?

Alexis Tsipras, Prime Minister of Greece, Asks Parliament for Referendum on July 5, 2015

Greece has just a tad more population, at 11 million, than New York City and its boroughs. But this morning, it has caused hundreds of billions of dollars to be erased from stock and bond markets around the world.

The situation in Greece this morning is as follows: banks and the Athens Stock Exchange have been closed until at least July 6, following a breakdown in talks between Greek Prime Minister Alexis Tsipras and the country’s creditors. The July 6 date stems from the vote in the Greek parliament over the weekend to hold a July 5 referendum allowing Greek citizens to vote on the austerity program offered by creditors in exchange for extending more loans to Greece. As a result of a run on the banks as the talks disintegrated, capital controls have now been imposed in Greece, allowing Greek depositors to withdraw no more than just €60 a day (about $66). Moody’s is out with a report this morning indicating that private sector deposits in the Greek banking system have diminished to approximately $133 billion, a decline of approximately $49 billion since November of last year.

This Tuesday, a loan made to Greece by the International Monetary Fund comes due, totaling 1.6 billion Euros, and it is highly unlikely that Greece will be able to make the payment, putting it officially into debt default.

How Greece will climb out of this predicament is very much in doubt. This morning its two year notes have sold off sharply with yields at one point reaching 33 percent. Although the Athens Stock Exchange is closed, Greek bank stocks trade on other international markets and they are seeing significant losses. Bloomberg Business reported this morning that “The National Bank of Greece SA plunged 30 percent in early New York trading.”

The crisis in Greece is spilling over into foreign stock and bond markets for a number of reasons. An immediate impact has been investors backing away from the bonds of other weak Eurozone countries like Portugal, Spain and Italy, pushing their yields up and bond prices down. Heretofore, adopting the Euro was seen as a permanent, irreversible position. But should Greece decide to exit the Euro to save itself from massive economic dislocations, the permanency of the Euro is thrown into doubt should other weak countries have similar difficulties.