Just when you thought it was safe

Just when everything seemed to be going back to (near) normal, the Greek Prime Minister and his cabinet have decided to put his country’s agreement to resolve its sovereign debt crisis to a referendum.

This is in the interests of national unity at home — and may even be in the premier’s own political self interest, though this piece in the FT seems to doubt that — but it is most definitely not in the interest of the other European states stakeholders in the situation, who would prefer to have resolution. “The announcement spread panic in financial markets on Tuesday and raised fears that it could result in a disorderly default by [the Greek government].”

If it is not known whether Greece will complete the agreed deal, then none of the entities involved are able to know the effects on their balance sheets, or thence to be able to manage their own risks going forward. As one person put it, “We are all going to hell in a hand cart.” It will also make it more difficult to engage others, such as China, to get involved in sorting out the situation.

The S&P 500 fell 2.8% on the news and spreads on Italian bonds reached their highest levels since the launch of the euro.

In other news, the planned restart of one nuclear reactor at Fukushima was halted after 24 hours when a possible leak of radioactive material was detected.

And at the same time, one entity that did manage to restart was the agricultural commodities market in Australia (the world’s largest exporter of wool), which had been shut the previous day following the bankruptcy of MF Global and the resulting need to sort out that company’s outstanding financial positions. (It reportedly accounted for over 80% 0f wool trades — hence the need for the shutdown.)

The cause of all this? Separately, MF Global had made “big bets on the European sovereign debt market“, which did not turn out as expected.

Lessons to be learned:

  • Agreements you thought you had may not turn out as you expected, or may (eventually) come right more strongly than you expected
  • The intervening uncertainty may cause further damage
  • Trading parters, and entire markets, can be brought to a standstill by events on the other side of the world, and in an unrelated industry

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