Short Takes

Germany is proposing harsh measures for Greece, such as suspending the democratic process to assure things are done the way the EU wants. You can make an argument the harsh demands from Germany are meant to force Greece to say “enough”. In a Financial Times column, Wolfgang Munchau touches on that subject (excerpts below):

The most extreme proposal is to suspend the elections and keep the technical government of Lucas Papademos in place for much longer. A senior German official has told me that his preference is to force Greece into an immediate default. I can therefore only make sense of Mr Schäuble’s proposal to postpone elections as a targeted provocation intended to illicit an extreme reaction from Athens. If that was the goal, it seems to be working. The situation highlights the political vulnerability of the current eurozone rescue strategy.

Things remain tense relative to an EU approval of the next bailout for Greece. Even if Greece gets the next check, it appears as if Greece will remain an ongoing problem (something we already knew). The excerpts below come from an article published by the Guardian:

Angela Merkel, Mario Monti and Lucas Papademos ‘confident’ deal on €130bn (£108bn) bailout would be struck on Monday, but concerns are growing behind the scenes.

The German news weekly Der Spiegel reports that a majority of eurogroup finance ministers are readying themselves for a collapse of the latest rescue package on Monday – or, at least, leaving it to a planned EU summit on 1 March to decide.

Greek hopes of winning the final go-ahead for a new €130bn (£108bn) bailout when eurozone finance ministers meet on Monday could be shattered even though Athens has agreed to further bruising savings.

The optimism seeped into global markets with the Dow Jones rising towards 13,000 points in New York and the FTSE 100 inching close to the 6000-mark. But, behind the scenes, sources indicated it could be seriously misplaced.

“Scepticism is especially strong among the AAA-rated states (Germany, Finland, the Netherlands) whether Greece can turn it around,” said Maria Fekter, Austrian finance minister. “The threat of a Greek default is not off the table.”

In Berlin officials rebutted widespread reports of a growing rift between Merkel, who backs Greece staying a member of the euro, and Schäuble.

Amid growing evidence of a significant split between Merkel and her finance minister Wolfgang Schäuble on a new Greek bailout, some officials spoke darkly of Athens being allowed to default within the eurozone by early summer.

In a seemingly endless tussle between stability and solidarity, finance ministers could end up agreeing to the bailout but only in tranches – with the first one, required for Greece to repay €14.5bn of debt by 20 March, held in an escrow account. This account would be topped up only if Athens did indeed service its debts and implement reforms.

More from Saturday’s news: German Finance Minister Wants Greece To Default.

Most of the media coverage clearly states an expectation of the 2nd bailout being approved for Greece, but an article in the Telegraph (excerpts below) says Monday’s meeting may leave the markets disappointed:

Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiralling out of control - with or without a second bailout.

The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a “haircut” on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.

Eurozone finance ministers meet on Monday to approve the next tranche of loans from the EU and the International Monetary Fund, designed to stave off national bankruptcy while the new Greek government puts the country’s finances in order.

But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them.

Mr Schäuble’s pessimism will not be welcomed in Athens. The hugely influential German politician’s doubts have been growing for several weeks, and prompted angry exchanges when Greece accused Germany of trying to drive it out of the euro.

His scepticism is not yet fully shared by Angela Merkel, who is said still to be determined to prevent Greece’s financial collapse. “She thinks Greece going bust could cause a shock wave that buries other countries - with Spain and Italy among them. It could break apart the entire monetary union,” said an official.

But it has support from Austria and Finland - holding the prospect that a eurozone meeting tomorrow will fail to agree the next set of EU-IMF payments for Greece.

While the market cheered yesterday’s news of the ECB preparing to swap out their Greek bonds for new ones, we said to ourselves, “This isn’t good news…this is the ECB preparing for default/avoiding losses.” Bloomberg seems to agree:

Zero Hedge has a short article written by John R. Taylor, Jr., the Chief Investment Officer of FX Concepts. John has over 40 years of experience in the foreign exchange and related fixed income markets. Prior to founding FX Concepts, John was a Vice President at Citibank, where he headed the bank’s marketing and advisory services in foreign exchange. John began his career at Chemical Bank, where he founded that bank’s Foreign Exchange Advisory Service in 1972. John Taylor understands the big picture. John Taylor is concerned the markets are underestimating the impact of a Greek default. Below are some excerpts from the piece on Zero Hedge:

Global investors either have extremely short memories or they are far too concrete, as my wife the psychologist would say. Saying that Greece is not a bank but a country means nothing. Almost all Europeans argue that a default by the Greek government would now be more straightforward and not as significant as the collapse and bankruptcy of Lehman Brothers in September 2008, especially since the Eurozone, under the influence of the surplus countries, has effectively ‘ring-fenced’ Greece from the other 16 members. Lehman was not a very large factor in the global banking scene with less than one quarter the capital of the biggest US banks and with assets below those of more than 100 banks around the world. Greece might represent less than 3% of the GDP of the Eurozone, but when lined up against Lehman, Greece stands larger in its relevant market. Anyone can read the newspapers, blogs, and Internet scribblings before the Lehman collapse and see that the impact of its collapse was not expected to be significant.

Rereading the documents and remembering the situation as I set out for a weekend cruise on the Chesapeake, the world was not worried. The market had already seen the rescues or restructuring of Washington Mutual, Countrywide, Fannie Mae, and Freddie Mac, so no one was worried. This looked like another Bear Stearns, a manageable problem but this time the Bush administration was not interested in getting involved – ‘let the market solve this, don’t throw good money after the bad.’ So, what is the difference now? The world is as blasé about a Greek default or departure from the euro as it can be – credit spreads are dropping, the other weak Eurozone sovereigns are financing themselves easily, and everyone thinks the LTRO has solved the problem for the next year or two. Why should we worry about Greece?

The market has not opened its eyes to the impact this Greek unraveling will have. The Eurozone will be mortally wounded and the world will suffer a significant recession – maybe as deep as 2008. European banks will lose much of their capital base and many should be bankrupt, but just as in the Lehman aftermath, the governments will try to save the banks and the banks’ bondholders, solvent or not. As the bank appetite for Eurozone sovereign paper will be decimated, austerity will probably follow shortly, followed by deflation and uncontrollable money creation. The European recession should be one for the record books.

The Journal reported a few minutes ago:

THE GREEK GOVERNMENT has announced that its income for the first month of the year was €1 billion lower than expected.

Greek news site Ekathimerini reports that data published by the Ministry of Finance this morning showed that the government’s revenues for January were down by 7 per cent on the same period last year.

That contrasts with Budget projections which had anticipated an 8.9 per cent increase on last year’s income – leaving a gap of €1 billion more than the budget had expected.

The Associated Press reported this morning a list of new demands placed on Greece by the European Union. They include:

Greece must cut pharmaceutical spending by another euro1 billion ($1.32 billion), slash another euro300 million from its defense budget and reduce central government and election-related spending by euro270 million.

Also, the government must slash its public investment budget by euro400 million, to be achieved “through cuts in subsidies to private investments and nationally financed investment projects,” according to the document.

Moreover, as first outlined last week, Greece will have to cut its budget by a further euro325 million to meet its debt reduction targets through “additional structural spending cuts” to be identified by the creditors and the government in Athens at a later, unspecified date, the document said.

Greece won’t have much time to implement the prior actions. With billions of its bonds due late next month, Greece faces bankruptcy unless it receives more international assistance.

There is still quite a bit of uncertainty in Greece; according to the Guardian:

City analysts are speculating that the situation in Greece could be thrown into confusion in a couple of months if Antonis Samaras, head of the New Democracy party, becomes Greece’s next prime minister. Samaras, the current front-runner to replace Lucas Papademos, told parliament last night: “I ask you to vote in favour of the new loan agreement today and to have the ability to negotiate and change the current policy which has been forced on us”.

Samaras also said his party will “demand the dissolution of parliament and immediate elections” once the second rescue deal is ageed. Elisabeth Afseth, analyst at Investec, also warned this morning that “the next Greek crisis is then likely to come with the approaching election”. New Democracy wants that vote to be held in April……

As we have stated for some time, if we see a pullback, what matters most is how we pull back (sharp/vertical or somewhat controlled/corrective).

From Reuters:

Greek political leaders have clinched a deal on austerity measures needed to secure a bailout to keep the country afloat, two government sources said on Thursday.

While there is no question the longer-term technical outlook for stocks has improved, short-term conditions aligning with a possible correction have not been cleared yet. Our base case calls for a correction, maybe 4% to 6%, followed by further upside. If and how we come down will go a long way in terms of getting a better read on the markets from an intermediate-term perspective.

With citizens opposing further austerity, Greek leaders want them to understand the alternative (default). From Bloomberg:

Greece’s Prime Minister Lucas Papademos requested the country’s Finance Ministry to prepare a document on the implications of a Greek default, Panos Beglitis, spokesman for the socialist Pasok Party said.