The S&P 500 closed below its 200-day moving average on Wednesday. A break in this critical support level was reversed the previous session as the bulls reacted to reports that a short-term deal might be in the works to help Greece make a July 20 debt payment to the European Central Bank, unlocking financing to reopen its financial institutions.
Tuesday’s bounce also came after President Obama stepped into the breach with calls to Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel urging both sides to come to a "durable" agreement.
The market breakdown — through a level of support that, aside from last year's Ebola-driven scare, has buttressed stocks since late 2012 — is an indication of just how much could be riding on how the Greek drama plays out. And, in a way, it highlights how Obama has more riding on the outcome than you might think.
Unlike Obamacare, the post-2009 bull market is something that both Democrats and Republicans appreciate. A wipeout now would undermine Obama’s economic progress and threaten his party's changes in the 2016 elections — something Hillary Clinton is obviously worried about, too.
With his presidential term in its twilight, Obama’s mind must be turning to his legacy. And when it comes to the financial markets, that means preventing stocks from tipping into a correction or worse, something that hasn't happened in three years.
The problem is that the Greek debt situation is intractable. If Obama thought he had it tough dealing with congressional Republicans on budget issues, that's nothing compared to the standoff between Greece and its hardline creditors.
European leaders have set a Sunday deadline for a deal — a short-term agreement that reportedly would require Athens to pass budget measures in exchange for the prospect of debt reduction as part of a longer-term deal. The short-term deal would fund Greece through the end of the month, defusing fears about a default on a bond payment of $3.8 billion to the European Central Bank on July 20.
The latest deadline is a full week after Greek citizens voted against the last major bailout package the European establishment had offered, rejecting further budget austerity amid a 50 percent youth unemployment rate and an economy that's fallen back into recession.
Greek leaders are riding that vote in searching for a deal featuring debt relief, which is what the country really needs to get back on its feet. Turning against the Eurogroup consensus, the International Monetary Fund — supported by U.S. officials —backed this demand in a recent analysis.
Specifically, the IMF has said the Eurozone will need to provide Greece with at least $55 billion in funding over the next three years and a debt write-down of 30 percent to achieve debt sustainability targets set in 2012. At a minimum, this could be achieved by lengthening the maturity of existing obligations, lowering the present value of those debts and lightening the load of repayment on the beleaguered Greek economy.
But the voters in core Eurozone countries like Germany are increasingly frustrated with the situation. They are reluctant to pay to let Greece off the hook, especially given the origins of this crisis, which include overspending on defense in the 1980s, hidden debts covered up with the help of Goldman Sachs, and a national pastime of tax avoidance and economic corruption.
Moreover, there is a concern about moral hazard. James Mackintosh at the Financial Times summarizes the situation: "If the Greeks are allowed to walk away from that debt, Spaniards, Portuguese, Italians and Irish will quite reasonably say they should be let off, too." Thus, Germany and other core nations can't indulge Greece's demands for fear of fueling similar anti-austerity political movements such as Podemos in Spain and the Five Star Movement in Italy.
The outcome also depends on the action of the ECB and whether it increases, holds steady or cuts its liquidity support of the Greek banking system. You'll remember that Greece's banks have been closed since last week, and on Monday the ECB increased the haircut on collateral it accepts from Greek banks, moving them closer to insolvency.
Reuters is reporting that these banks will stay closed at least until Friday. Meanwhile, grocery shelves are growing bare and businesses are on the verge of shutting down as supply chains are disrupted. Greek depositors holding large balances — unable to transfer money out of the country or withdraw more than $66 dollars from ATMs per day — are at risk of a "bail in" of at least 30 percent on deposits above $8,800, according to the Financial Times.
Unless Obama can encourage Europe to countenance Greek debt relief soon and Greek leaders to embrace the austerity measures their people just voted against, the situation will quickly deteriorate. The markets have taken the developments thus far in stride — but a surprise in the final act of this drama could still pull U.S. stocks down in a way we haven't seen in years.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to The Fiscal Times readers. Clink the links above to sign up.