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Is the Party Over?
New York: February 13, 2012
By John Stephenson

The bull market in stocks and commodities was dealt a setback on Friday as a plan to help Greece avoid default threatened to unravel. The benchmark S&P500 stock index snapped a five-week winning streak when George Karatzaferis, one of Greece's coalition party leaders, said the proposed path forward for the nation is wrong and he can't vote for the accord. To avoid an almost certain default, Greece needs to receive an emergency bailout of 130 billion euros by March 20th. In exchange for receiving additional funds, Greece must turn its budget cuts into law and find an additional 325million euros in spending cuts.

Resolution of the bailout talks, which have been dragging on since July, would allow Greece to make the March bond payment and avoid dragging the Eurozone to the precipice. Without a successful passage of the budget measures by the Greek parliament, the threat of speculators targeting debt-saddled nations including Portugal and Italy remains.

The emergency Eurozone talks broke up on February 9, with Luxembourg Prime Minister Jean-Claude Juncker saying "We can't live with this system while promises are repeated and repeated and implementation measures are sometimes too weak. In short: no disbursement without implementation."

The plan calls for 150,000 government job cuts by 2015, with 15,000 mandatory cuts this year, plus a 22 percent reduction in the private sector minimum wage.

But by late Friday, word spread that Greek Prime Minister Lucas Papademos had obtained approval from his cabinet for necessary budget cuts needed to secure a second package of international aid. The news capped a week of tense negotiations between Greece and the international community which saw five government minsters resign in two hours while protestors clashed with Athens police over the anti-austerity measures.

Despite the fact that Greece still remains at odds with its lenders, the government has the necessary votes to pass the budget cuts, leaving next Wednesday's meeting with European policymakers as the final obstacle to Greece receiving the bailout package. And while the details of Greece's budget measures won't meet IMF and European demands to the letter, they will be close enough to keep the financial spigot open, avoiding for now, a disorderly default of Greek debt.

Even if the market's worse fears are avoided, the path toward European economic health won't be one of steady healing. There will be many twists and turns on the path forward, which will cause big reversals over 2012 for the fortunes of risk assets and the euro.

The first challenge to the Eurozone will be from the upcoming elections in Greece and France. The pattern so far in European elections has been to turf the incumbent government, as recently witnessed in Ireland, Spain and Portugal. In France, Sarkozy's government is under siege by the socialists and the opinion polls show that the Pasok party and the New Democracy party who opposed the current austerity measures in Greece are in the lead.

As belt-tightening measures crater economic output, markets are sure to take a dimmer view of Europe's strict adherence to crushing austerity as the principal medicine to cure the crisis. Greek unemployment recently spiked to nearly 21 percent as earlier belt-tightening measures were invoked further curbing the country's anemic economic output.

If Greece is successful in receiving its next bailout check sometime after the February 15th extraordinary meeting of Eurozone leaders, the bull market in risk assets will once again be alive and well. Money center banks in New York, as well as commodities such as copper, oil and gold will move higher as Europe dodges another bullet on its winding way toward resolution of its debt crisis.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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