Saturday, May 7, 2011

Late Afternoon Rumor

Late Friday afternoon, the market was doing fine but then suddenly dropped about 50 points and didn't recover before the bell rang, closing the market.  There was a rumor that Greece was dumping the Euro and replacing it with their old currency, the Drachma and leaving the European Union.  Not only did the market sink, but so did the Euro, while the dollar rallied.

What makes this interesting is that it was totally untrue.  Yet, the market reacted anyway.  What was true was that European central bankers were meeting to discuss the ongoing financial crisis of Greece, whose austerity package is not austere enough.  Certainly, the Greeks most impacted by the austerity package are ready to dump the Euro and leave the Union but only because they don't understand the consequences.

If Greece did this, the first question would be what happens to the bonds they have already issued, which are payable in Euros, not Drachmas.  With that uncertainty, the value of those bonds would crash.  If Greece tried to issue new bonds, the interest rate would be prohibitive.  Taxes would immediately be increased to pay the additional interest.  There would be massive layoffs by both government and business.  Greece would likely experience a genuine depression.  It would be both ugly, tragic and unnecessary!

Yet, the market reacted as if the Greeks would really choose that alternative, which says more about the panicky nature of traders than the Greeks.