Greece crisis: One deduction emerges loud – Eurozone is in trouble

Outlook:

This is going to be a horrible week, not only because of the Greek drama but also because the quarter ends tomorrow, setting off a new earnings season. US markets are closed Friday for the July 4 holiday, one of the few that really does close down commercial and finan-cial activity.

We get quite a lot of important data—see the calendars—including today’s NAR home sales, expected to show a retreat after an extraordinary 3.4% gain in April. On Wednesday we will get the ADP forecast of the private sector component of NFP and on Thursday we will get both the usual unemployment claims and payrolls itself.

Payrolls always roils. The current forecast is for payrolls at 230,000 in June, under May’s 280,000 but higher than the 2015 average thus far at 217,000. We also need to look at wage growth. On Wednesday, it’s the ISM manufacturing survey. Two other key reports are auto sales and the Case-Shiller home price index tomorrow, forecast to show a rise by 5.7% in April after 5% in March.

Let’s not bypass another default—Puerto Rico announced Sunday night that the debt crisis is bigger than we knew and a restructuring needs to be started. According to the FT, “Public sector debt is estimated to have reached 100 per cent of Puerto Rico’s gross national product at the end of last year, as revenues have on average been 15 per cent lower than projected since 2004.” The report was prepared by former IMF economist Ann Krueger, who proposes that the primacy of general obligation bonds be honored—over other obligations, like pensions. As a territory and not a state, nor a sovereign, Puerto Rico can’t get bankruptcy protection or IMF loans. Actually, Puerto Rico is a lot like Greece in having overspent, un-der-reported, maintained messy records, and landed in the hole without a life-line.

Another issue is the Fed. The WSJ reports the IMF has just released a paper showing how the Fed may be misjudging the data and urging it to delay the First Rate Hike until mid-2016—to be sure to avoid “dark corners.” A critical phrase—delay will result in “a modest, but planned, overshooting of infla-tion.” Oh, dear.

About Greece: we hear from a Reader that “No one knows what will happen. One thing is for sure, if the referendum takes place, there will be no definite winner. Even worse, no one really knows what voting 'yes' or 'no' really means and what the consequences will be.” This is in keeping with the worry that the wording of the referendum is critical. If the voters say “yes,” it may or may not mean Tsipras has to resign, but if he did resign, who better is waiting in the wings? One certainty is that the Greek people have been ill-served by their public servants. The old saw has it that people get the govern-ment they deserve, but as a practical matter, right now what counts is not allowing bad government to result literally in starvation in the eurozone, one of the richest regions in the world. As Tony Barber writes in the FT, “… for now, the overriding priority must be to help Greece — in or out of the euro-zone.”

And who would lead such a mission? It must be Merkel. She has already said she will speak with Tspiras if he wants to talk but the first step has to come from Athens. Meanwhile, former PM and oppo-sition leader Samaras lashed out in parliament, accusing Tspiras of being dishonest to the public. “You are not telling the Greek people what a ‘no’ means. No means bankruptcy and euro exit… “You failed dramatically and loudly, Mr. Tsipras.” One report has it that Samaras has called for a vote of confidence on Tsipras, which upsets the apple cart in several possible directions, including a postponement of the referendum.

We also have the bizarre show of EC chairman Juncker, speaking a few words in Greek, saying at a press conference today “I will never let the Greek people down, ever – and I know that the Greek people don’t want to let the EU down.” He called outright for a “Yes” vote. Juncker also said Tsipras betrayed the Eurogroup, although he doesn’t blame him personally. Talk about interfering in the political affairs of a member state! And yes, Pres Obama and TreasSec Lew also reached out over the weekend to the IMF and eurozone officials to urge a solution and to Athens to encourage capital controls. The IMF and NATO connection makes such interference justifiable (just barely), not to mention the “Lehman mo-ment” aspect.

Following the Greek drama can take up all your time if you let it, and we did (it was a rainy weekend). Just as interesting as the press reports are the tweets and letters to the editors and commentators. The vitriol from Germany is especially notable. One deduction that emerges loud and clear is that the euro-zone really is in trouble. It lacks the institutions and the authorities, not to mention the political exper-tise, to make “union” work. Greek leadership failed, to be sure, but the bigger failure belongs to those with the real power. To a certain extent, everything now hinges on what the ECB can and will do under its own authority, and how that differs from what the eurozone powers tell the ECB to do. Can the eu-rogroup or any other EMU institution order the ECB around? The ECB may land in the European court of Justice again. Last time it was the legal authority to conduct OMT. Maybe next time it’s the authority to lend to a country’s banks when the country is in default.

However the saga develops this week, it may or may not be euro-negative. It’s always a mistake to as-sume major problems result in a falling currency. It seems logical, but markets follow their own self-interest, not logic. Remember that carry-trade argument last week!