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Greek election over: Fed to the rescue?

(MoneyWatch) The Greek elections have come and gone and the world kept spinning. Just like in the May elections, no party will win enough seats in the 300-member parliament to form a government on its own. The projections showed New Democracy winning 29.5 percent and 128 seats. The radical left Syriza party, which has vowed to repeal Greece's international bailout deal, was expected to come in second with 27.1 percent and 72 seats. PASOK trails with 12.3 percent and 33 seats. To form a majority government, a coalition would need at least 151 seats.

At this point, there will be political wrangling to form a coalition. If the center-right New Democracy and the socialist PASOK form a coalition, there is optimism that Greece will stay in the eurozone. Analysts have said that the election was a referendum on the terms of Greece's bailout, in which the "troika" (the European Central Bank, the European Commission and the International Monetary Fund) imposed tough austerity measures in exchanges for the money.

As Greece muddles through, attention will turn to the more significant systemic risks that have the potential to bring down the eurozone: Italy and Spain. The eurozone's third and fourth largest economies (after Germany and France) may not carry as much debt as a percentage of their overall economies as Greece, but the sheer size of each makes bailing them out very difficult.

The bond market telegraphed that Spain and Italy were bound to become the eurozone's next problem children. Last week, Spain's cost of borrowing for 10 years breached the all-important 7 percent level - the point at which Ireland, Greece and Portugal were all forced to seek bailouts. Italy had to pay 6.13 percent for 10 years and 5.3 percent for 3 years, up 1.4 percent in just the last month.

The increased borrowing costs indicate that investors are losing confidence and are leery of lending to the debt-ridden nations. When governments, banks and businesses can't access credit, the effect on the financial system and the region's economy is dire.

Looking back at the 2008 U.S. financial crisis as an analogy, Greece may come to be seen as Lehman Brothers, whose September 2008 failure set off a cascading chain of events that resulted in the financial system freezing up, the stock market crashing, general chaos ensuing and the deepest recession since the 1930s. Spain and Italy are the next to be dragged down the debt rabbit hole, just as Merrill Lynch, Citigroup, Morgan Stanley and Goldman Sachs were in the fall of 2008. To prevent the contagion from spreading to those companies, the Federal Reserve and the U.S. Treasury pulled out all of the stops and erected a ring fence around them. Today, it will primarily be up to the European Central Bank to figure out how to do the same for Italy and Spain.

While the ECB will do the heavy lifting, it may not be alone. The two largest EU countries that do not use the common currency said they would amp up central bank action if necessary. Last week, the British government announced aggressive emergency plans to flood the economy with over $160 billion of cheap loans, while Switzerland said it would take action to prevent a precipitous rise in the Swiss franc.

This week, investors will look to Ben Bernanke and the Fed to see whether the central bank has similar plans. Various Fed governors have publicly said that they are prepared to reactivate several programs from the 2008-2009 financial crisis play book, if conditions worsen. At the last Fed meeting in April, there was no mention of additional forms of stimulus, though in his press conference, Chairman Bernanke said he "is prepared to do more, if needed." Investors want to know if the Fed thinks it's needed now, either because of the eurozone tensions or because the U.S. economy is slowing down and job creation is stalling. The Fed could extend Operation Twist, the bond-buying program which is due to end at the end of June, or embark on another round of quantitative easing.

Meanwhile, the G-20 kicks off a two-day meeting in Mexico on Monday and later in the week, eurozone leaders will convene in Rome. In both meetings, the focus will be on preventing Greece from destabilizing the eurozone (and the global economy) and establishing and executing coordinated central bank intervention as a tool to blunt the effects of a euro melt-down.

The real question that looms is whether the region can become a true economic union. Most analysts and economists believe that the key to resolving the debt crisis is for the 17 nations to transcend the common currency and become a more fully integrated fiscal union with central budget controls. Doing so would mean that wealthier nations like Germany would be on the hook for debt of the PIIGS and that the PIIGs would have to give up a large portion of control over their national finances.

It has been said that Europe does not move without a crisis. With the continent approaching the boiling point, the question is, will the Europeans blink or let the crisis engulf them (and sadly, us too!) Stay tuned...the Greek elections were just another scene in a yet-to-be-determined act of the eurozone crisis.

The volatile week for stocks ended with gains, as investors bet on more central bank action. For those wishing to hide, they found cover in U.S. government bonds. The cost for that protection is steep: Investors are willing to be paid only 1.6 percent over 10 years, which after inflation means that they are paying the government to hold their money.

-- DJIA: 12,767, up 1.7% on week, up 4.5% on year (up 5.35% over the last two weeks)

-- S&P 500: 1,342, up 1.3% on week, up 6.8% on year (up 5% over the last two weeks)

-- NASDAQ: 2,872, up 0.50% on week, up 10.3% on year (up 4.5% over the last two weeks)

-- July Crude Oil: $84.03, down $.07 on week

-- August Gold: $1,628.10 up $6 on the week

-- AAA National Average Price for Gallon of Regular Gas: $3.51


Mon 6/18:

Start of two day G20 summit meeting in Los Cabos, Mexico

Housing Market Index

Tues 6/19:

JP Morgan Chase CEO appears before House committee to discuss trading losses

FOMC Meeting Begins

8:30 Housing Starts

10:00 Job Opening and Labor Turnover (JOLTS)

Weds 6/20:

7:00 MBA mortgage purchase applications index

12:30 FOMC Meeting Announcement

2:00 FOMC Forecasts

2:15 Fed Chairman Bernanke Press Conference

Thurs 6/21:

Meeting of eurozone finance ministers

8:30 Weekly jobless claims

10:00 Existing Home Sales

10:00 Philly Fed Survey

10:00 FHFA Home Prices

10:00 Leading Indicators

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