Greek Déjà Vu

Thursday was met with steep market volatility again, likely driven by two developments—partly the market blowing a raspberry at the Fed’s head-scratching attemptto flatten the yield curve, and fears over ongoing eurozone debt woes. Indeed, mimicking events from June (and last October), Athenian transit workers and teachers nationwide went on strike Thursday to protest a new round of austerity measures designed to appease the country’s international creditors.

As unpopular as austerity measures might be, Greece is essentially forcedto make these moves to receive an €8 billion tranche of aid in October from the EU and IMF (as outlined in their July bailout agreement). Securing the upcoming tranche of aid likely sustains the country’s cash needs through the year-end, but more austerity measures likely follow. And just as more austerity measures are likely, so too are strikes. The country’s two main umbrella unionsannounced nationwide strikes on October 5 and 19.

The proposals announced Thursday focus on reining in generous entitlement programs, government payroll bloat and lax income tax policies. Among the measures proposed:

• A 20% cut to pensions over €1,200 per month, and a 40% cut to pensions for retirees under age 55 receiving over €1,000 per month.
• Cutting the minimum income tax threshold from €12,000 to €5,000.
• Placing 30,000 state employees on partial pay—expected to be as little as 60% of their salary by the end of 2011.
• A new pay scheme for civil servants to generate additional savings estimated between €800m and €1bn per year.

Although these measures must still receive parliamentary approval, they’re likely to pass, as the country seemingly has cash to sustain its needs only through mid-October. But politicians may argue it to the last possible moment in an attempt to appease their constituents. Along the way, it’s likely Greek debt fears, strikes and eurozone plans continue to garner headlines and contribute to more market volatility in both directions.

As for Thursday’s volatility, such big down days can feel excruciating—no matter the cause. But it’s important to remember they are no more predictive of the future than a big up day signals all is well ahead. And we’ve had our fair share of big up days recently as well. While the urge to take action amid such market swings can be compelling, recoveries from such choppiness are typically swift, strong and begin at completely unpredictable times. We continue to believe that, looking forward, economic growth and the bull market will likely continue, but even so, they won’t be devoid of trying times along the way.