Sunday, February 19, 2012

Can kicking

The Dow close to 13,000 . Markets enjoying a rolling top. Most institutional investors in neutral , unsure what to do next . The positive momentum in indices driven by hope. Hope that Greece will avoid default, hope that Europe will avoid contagion, hope that the US is in the midst of a cyclical rebound and past the worst .

Dominating every investment decision is the question - Will Greece default ? The answer lies not only in Athens but in Berlin . In recent weeks a split has developed within the German cabinet over the strategy that should be adopted towards their southern € - partner. The Finance Minister , Wolfgang Schauble, despite being an ardent pro-European, has expressed open doubts about the Greeks commitment to reform . In this he reflects the views of a large percentage of the German population plus many in the Dutch and Finnish governments.

By contrast Frau Merkel is keeping her cards close to her chest. She wants to see how the domestic political landscape develops in the aftermath of President Wulff's resignation . Above all she is interested in retaining power at the next election. This , in the absence of her rapidly collapsing Liberal partners , might mean forming a grand CDU-SPD coalition. To this end she will adopt a ' bide my time ' strategy and avoid any grandiose gestures that might lose votes . It does no harm to have Germany talk tough .

As of today it is likely that Germany will back the €130 billion bail-out package for Greece. Euro scepticism remains a large, but still minority, view . The final vote within the cabinet will be taken on short term political advantage - German short term political advantage. For the time being no one wants to be held responsible for vetoing the expected bailout. Expect markets to rally further.

The real turmoil lies ahead, after the French Presidential elections in May.
Until then there are advantages for all concerned - Greeks, Germans, French, the EU Commission, Euroland banks - in preserving the status quo and kicking the can just a little further down the road . Even if , as expected, there is a debt swap , Greece , in the absence of growth, will be back at the centre of markets attention by the end of Q2. Default , but within the Eurozone , will be seen as an increasingly likely outcome .

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