A few weeks ago, I wrote about the shape of bottom for the European financial crisis as being similar to the last U.S. recession, which was not V-shaped, nor U-shaped, but looked more like the Nike Swoosh, i.e., bumping along the bottom before beginning a long, slow recovery.
After such high expectations for a deal to be announced yesterday, the market has been very well-behaved and has not over-reacted to the disappointment. Six months ago, the market would have dropped 200 points. Market volatility has definitely decreased but why?
Sure, it may simply be crisis-fatigue. Fortunately, this has been such a slow-motion train wreck that companies have had time to prepare for a modest financial collapse. There have also been a surprisingly large number of small "stopgap" measures taken by the EU and ECB. Or, it may be the way credit default swaps are collateralized. The holder of the swap has the right to demand additional collateral under certain circumstances. At this point, it is estimated that 90% of the swaps guaranteeing Greek debt have now been collateralized. When the collapse of Lehman sent the U.S. financial markets spiraling down, almost none of the swaps on Lehman's debt were collateralized. This could minimize the damage of a disorderly Greek default.
Once we get past the baby bull market of January, when new funds flow into retirement plans, we may see a market that is even more resilient to European news. I hope so!
After such high expectations for a deal to be announced yesterday, the market has been very well-behaved and has not over-reacted to the disappointment. Six months ago, the market would have dropped 200 points. Market volatility has definitely decreased but why?
Sure, it may simply be crisis-fatigue. Fortunately, this has been such a slow-motion train wreck that companies have had time to prepare for a modest financial collapse. There have also been a surprisingly large number of small "stopgap" measures taken by the EU and ECB. Or, it may be the way credit default swaps are collateralized. The holder of the swap has the right to demand additional collateral under certain circumstances. At this point, it is estimated that 90% of the swaps guaranteeing Greek debt have now been collateralized. When the collapse of Lehman sent the U.S. financial markets spiraling down, almost none of the swaps on Lehman's debt were collateralized. This could minimize the damage of a disorderly Greek default.
Once we get past the baby bull market of January, when new funds flow into retirement plans, we may see a market that is even more resilient to European news. I hope so!
