Nothing actually new here, but listening to Art Cashin retall the latest end of the world episode in that wise, grizzled voice of his brings a soothing element to what is set to be another dramamine-friendly week.
Friday’s stock market crumbled under the weight of rumors and worries about the Eurozone. Would Greece default over the weekend? Was Jurgen Stark’s sudden resignation from the ECB a power play by Merkel or the first shot of bringing the bailout debate to the German public? Would the weekend G-7 meeting result in a surprise policy lift? All those concerns, and more, crushed stocks on both sides of the pond.
Over the weekend, the battle has shifted. German authorities talk openly of the likelihood of a Greek default. They are said to be developing a plan to backstop German banks in the event of a Greek default. That puts pressure on other banks, especially French banks, since there is no Gallic backstop plan. Collateral damage could be to bring no bids to the next Greek auction, or make them pay such high rates as to make the auction toxic. The Euro crisis is quickly evolving into a Gordian Knot.
Although it is called a sovereign debt crisis, it was not the sovereigns who were in the front lines of the battle. It was the European banks that held a portion of the bonds issued by the weak sovereigns. If the market value of the sovereigns they held fell to, say, 50 cents on the dollar, those losses could make those banks insolvent. They would become the new Bear Stearns and Lehman. That’s why the rescue effort quickly shifted from simply bailing out Greece and the others to buying the sovereign debt to put a floor under those bonds. The rumored German backstop would, as we noted, shift focus back to the sovereigns with Greece running out of funds, possibly by month’s end.
U.S. markets are at near-critical levels. The uptrend line that caused the last bounce (S&P 1140) is around 1145. Key support levels are 1140, 1132, 1120 and ultimately 1101. The new Battle of Thermopylae is on the way.
Rumors of French nuclear accident has European markets reeling.