Feb. 24--Another intermission in the Greek debt drama and pacifying words from Federal Reserve Chair Janet Yellen have lifted stocks once again to new record highs.
Yet neither Greece nor the Fed is probably done unnerving investors for long. Stresses over both are likely to resurface in the spring as potential threats to the markets. Then, Greece's newly won four-month extension on its emergency bailout will have run out, and European leaders will have to decide again if keeping Greece in the eurozone is worth offering more relief from suffocating debts.
The debate could occur just as investors begin to worry that the Federal Reserve will start increasing interest rates in June.
While Federal Reserve Chair Janet Yellen did not say in testimony Tuesday before the Senate Banking Committee that the Fed's much anticipated rate increase will come in June, economists are leaning toward that conclusion after hearing her remarks.
Because the Fed has been coddling the economy since the financial crisis of 2008, investors have worried about how the economy, stocks and bonds will react as interest rates rise to more normal levels.
"It will introduce uncertainty," said Ed Cowart, portfolio manager of Eagle Asset Management.
He noted that there hasn't been a 10 percent correction in the stock market for over three years, and the first rate increase could set off such a plunge even though the Fed is likely to cautiously raise rates in tiny increments.
The mere mention of less stimulus by the Fed in 2013 set off what's been called the "taper tantrum." Stocks dropped and yields on Treasury bonds jumped sharply based on the assumption that the interest rate environment would be less friendly to investors.
Yellen was careful in her testimony Tuesday not to unleash such a reaction again. She said the Federal Reserve was still being "patient" before starting rate hikes. Although she said the jobs market is improving, she continues to be concerned about sluggish wage growth and a slow housing market. And she acknowledged that Europe's struggling economy could hold back the U.S., although she thinks low oil prices and stimulus from the European Central Bank will help Europe.
"Her comments on international economic conditions were a little more upbeat than before," said Capital Economics economist Paul Ashworth. "Overall, the Fed is clearly getting close to the first rate hike, which we expect in June."
Still, deflation is deepening in Europe as debt problems weigh on once thriving areas in addition to Greece, Portugal, Italy and Spain.
"Germany, France, Finland, Latvia and Estonia became the latest eurozone countries to see deflation, with the result that 17 of 19 member countries are now seeing falling consumer prices," said IHS Global Insight economist Howard Archer. "In addition, there was a marked widening in deflation in January in Spain, Italy, the Netherlands and Greece."
Deflation -- or falling prices -- seems to be spurring consumer purchases in the eurozone, he said. But economists worry about ongoing deflation stunting purchases. In entrenched deflationary cycles, consumers see no urgency to spend money because prices keep falling, creating better buys as time goes on. Deflation, then, feeds on itself. Businesses struggling to sell products cut jobs and pay. Consumers, then, are less able to spend.
Some European economies, such as Greece, are in serious recessions with massive debts and unemployment at about 26 percent.
To avoid bankruptcy, Greece has had to rely on stronger European countries with billions of dollars in bailouts. In the latest negotiations over an urgently needed extension of its bailout, Greek leaders balked at reforms other European countries were demanding in exchange for help. Greece contends that austerity demands have been so harsh the country can't grow out of its problems.
Investors worldwide were relieved Tuesday when European finance ministers accepted reform measures Greece promised in exchange for an urgently needed extension on its bailout financing. The deal still must be ratified by eurozone parliaments, but approval is expected.
Still, while Greece's problems may not play prominently in the news again until the four month extension starts to run out, there could be unsettling events even before then.
Negotiations over Greece's reform requirements could continue until the end of April, noted Jennifer McKeown, economist for Capital Economics. And there's still a question over where Greece will find the cash needed to finance itself and make a 1.5 billion euro payment to the International Monetary Fund next month, she said.
Most importantly, the deal that allowed markets to climb Tuesday, is merely an extension for Greece; not a fix for massive debts.
"The key point is that this deal is just a stopgap and nothing has yet been done to tackle Greece's unsustainable debt position," McKeown said. Although Greece has said it intends to pay its debts fully, "It seems clear that it will not be able to do so," she added.
gmarksjarvis@tribpub.com
