By MoneyMorning.com.au
Prepare For The Plunge When Democracy Breaks The Market…
Forget Occupy Wall Street. And its pale sickly cousins, Occupy Melbourne and Occupy Sydney here in Australia…
No one saw this coming.
The decision by Greek prime minister George Papandreou to call a referendum on the Greek debt bailout package – effectively asking the Greek people to vote on another decade of austerity – is a game changer.
It undoes the charade that was the Eurozone rescue plan. The referendum is set for January, meaning no investor will contribute to the Greek bailout fund before then. The bazooka is empty.
The Eurocrats thought they kicked the can down the road, but the Greeks have just kicked it back.
The Greeks like to say they gave democracy to the world. Well, this referendum is democracy in action. And if the Greeks say ‘NO’ to Europe, the end of the Eurozone as we know it will come much sooner than anyone predicted.
But the referendum is not a foregone conclusion. Actually it’s unlikely. Later this week, the Greek PM faces a confidence vote by the parliament. If he wins that vote – and it will be tight – the referendum call still has to pass a series of hurdles. Still, the market won’t like it.
If he loses, you’re probably looking at either a new leader or fresh elections. From the market’s perspective, that’s a slightly better option as it takes the referendum off the table.
But let’s be honest – there’s no good news here. This is what happens when politicians get backed into a corner. They respond in unpredictable ways. George Papandreou can’t keep his German and French masters happy AND retain the support of his party and people.
A policy of austerity – a euphemism for depression – cannot work in a democracy. People can withstand hardships. But not for years on end. The Eurocrats in Brussels are imposing a decade of depression on the Greek people. They won’t stand for it. Democracy will eventually undo the Eurozone.
The process has already started. Yields on Italian debt are rising to near-record levels. The chart below shows yields on Italian 10-year bonds trading just below the highs reached in early August, just before the European Central Bank intervened to push rates lower.
An interest rate of 6.2 per cent is prohibitively high for a country with more than €300 billion of sovereign debt to refinance in 2012 alone. And with recession a threat, the chances of Italy growing out of its debt burden anytime soon is remote.
What does all this mean?
Put simply, uncertainty and fear is back. This should see the market retest the lows of early October. I don’t think it will hold above this point for too long.
Greg Canavan
Editor, Sound Money. Sound Investments
P.S. Even before this calamity started unfolding, I identified four urgent sells on the Australian market. These are areas of the ASX that will be exposed to more mass selling by the end of the year. And if you hold shares in these sectors, you need to consider them dangerous for you to hold right now. To find out which four sectors are at risk – and what you need to do to protect your wealth now – click here…
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From the Archives…
Gain Without Pain
2011-10-28 – Greg Canavan
If a Butterfly Flaps its Wings in Frankston…
2011-10-27 – Kris Sayce
Dr Doom’s Warning for Aussie Investors
2011-10-26 – Kris Sayce
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2011-10-25 – Dan Denning
A Mistake That Could Cost Millions
2011-10-17 – Kris Sayce
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