Watch CBS News

Rising "Grexit" risk is beating down stocks

Markets on edge as Greece faces debt default 02:29

It was an ugly day for the global financial system on Monday as the cheap-money tranquility was abruptly shattered by the breakdown in the Greek bailout negotiations over the weekend. A Greek exit from the eurozone is growing more and more likely, ending the irrevocability of the euro and potentially undermining one of the world's major reserve currencies.

The Dow Jones industrials lost 2 percent in its biggest fall of the year to close below its 200-day moving average at 17,596. Technically, the drop to the 17,000 threshold looks likely as market breadth -- of the percentage of stocks in uptrends -- rolls over as buying interest wanes.

The fear was palpable, sending the CBOE Volatility Index (VIX) surging 35 percent for its biggest one-day gain since 2013. The iPath S&P 500 Short-Term VIX ETF (VXX), with a short open float of around 80 percent, posted its best one-day performance since 2011 as complacent investors were caught wrong-footed heading into the weekend.

indu062915.png

Safe haven inflows boosted U.S. Treasury bonds and gold. Crude oil lost 2.4 percent to close at $58.19 a barrel.

Adding to the pressure were comments from New York Federal Reserve President William Dudley that a September rate liftoff was still "very much in play" as well as an announcement from Puerto Rico's governor that its debts are "not payable."

Long story short: The far-left Syriza party in Athens is going to hold a referendum on July 5 to let the people decide whether they want to stay in the euro (and adopt more punishing austerity) or move toward restoring their national dignity and national currency by defaulting on their debts to the European establishment and the International Monetary Fund.

Greek banks are closed, capital controls are in place and deposits are limited after the European Central Bank responded to this by freezing its support of Greece's financial system.

What's got investors running scared is that this problem cannot be solved by more cheap-money easing by the major central banks. Monetary policy stimulus depends on the sanctification of debt, but Greece's firebrand Prime Minister Alexis Tsipras is undermining that in a big way, noting today that banks default, but countries don't.

The bankers have sacrificed the Greek people at the altar of fiat currency worship, enacting punishing austerity measures that have tipped the country back into recession, pushing the youth unemployment rate up to 50 percent and extinguishing the dreams of an entire generation.

Now, the birthplace of democracy is fighting back -- threatening to undermine the illusion of central bank omnipotence that has driven stocks higher in a correction-free uptrend since 2012.

Escalation is coming.

Tuesday marks the deadline for a $1.8 billion debt repayment to the IMF, something that Athens has already said it won't pay. It also marks the last day of the extension of the old Greek bailout program. The ECB is expected to start pulling back its support of Greece's financial system if no new deal is ironed out.

Greece is now threatening legal action as the European establishment and the ECB threatens to eject the country from the currency union if the referendum doesn't go their way, raising temperatures all around. Yet the Greeks, according to a report from the Hellenic Parliament, feel the way out is through the emergency escape: The report came to the conclusion that the country shouldn't pay the "illegal, illegitimate, and odious" debts demanded of it.

The Greeks' strategy, on the surface, appears to be maximizing the pain for their creditors as they walk away from decades of debt accumulation.

And that means investors are likely to keep selling.

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.