Wednesday, May 23, 2012

Wrong again!

A week ago I swore that Greece was on the verge of exploding. Once again I was directionally correct but premature. I underestimated the degree to which the EU will do anything to keep Greece afloat. The EU blinked and released bailout funds to allow Greece to recapitalize its banks, allowing the ECB to resume its “normal” lending operations. Catastrophe averted.

The EU would like to keep Greece alive until the Greek election next month. If an austerity government can be formed, the EU can continue to disburse funds as agreed. It is anybody’s guess how the election will turn out; it is pretty unlikely that it will be possible for any government to implement the agreed austerity policy. I do not think that a military coup is likely now; that would come later, after complete chaos. The military is not chomping at the bit for such an opportunity.

As long as the EU continues to disburse bailout money and the ECB continues to fund Greek deposit outflows, disaster is postponed. But already today, the Bundesbank has begun to make unhappy noises:

"Greece is threatening not to implement the reform and consolidation measures that were agreed in return for the large-scale aid programmes. This jeopardises the continued provision of assistance. Greece would have to bear the consequences of such a scenario".

The Bundesbank is saying that the game is up unless the new government is foursquare in favor of the agreed “reform and consolidation measures”.  Today’s media contains speculation about this weekend for the “Grexit”. I wouldn’t expect it until the voters have spoken in June. The current caretaker government doesn’t have the authority to do anything besides holding the next election. So we should have a few weeks of respite.

It might be worth noting what the bond market currently thinks about the weak sisters in the eurozone. The market has priced the bonds of Cyprus and Portugal for default (Caa), and prices Spain and Italy as speculative (Ba). Cypus has not yet asked for a bailout, but it will have to do so or follow Greece out of the euro. Portugal will stay alive as long as the government sticks to its austerity plan.

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