Is Merkel About to Annex Greece?
Content
Leveling the Playing Field
July 13, 2015
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At what point do I just hang out a sign that reads, “Check back after Greece is figured out”? As
long as domestic data doesn’t tank, the only headlines that matter are those out of Greece. I have
no idea how this is going to play out, but I know one thing – there are few people in the world I
want to upset less than Angela Merkel. I am starting to think she’s got the financial prowess of
Paul Volker, the stubbornness of George W., the marionette strings of James Bond’s boss, M,
and the intimidation factor of Debo (it’s too bad only six readers just got that last one). I don’t
want to ever cross her, and you shouldn’t, either.
For example, I (along with most) criticized the last two rounds of Greek bailouts because it was
so painfully obvious that Greece could not meet the repayment terms. I don’t run a research firm
with an unlimited budget to help ferret out nuggets of info like this, so that tells you how
transparent those deals were.
But while I cried “kicking the can down the road”, Merkel and crew were shifting bad Greek
debt out of private hands and into public hands (read: central banks). It was like a Cash for
Clunkers bailout where the trade in was Greek bonds. Had a Grexit surfaced then, imagine the
potential financial collapse. It could have rivaled the 2008 collapse.
But it never materialized, because Merkel was telling the ECB to backstop all peripheral debt.
So while I was bitching and moaning about enabling Greece like a spoiled child, Merkel was
biding her time, shoring up balance sheets, preparing for a showdown where Greece’s only
leverage would be stripped and a bluff could be called.
Greece’s only play, EVER, has been to take the Eurozone down with it. Merkel knew this and
made preparations for the showdown. When Tsipras called for the referendum, he played his
final card. He went all in, and Merkel called his bluff. She called it because Greece had been
isolated and the damage to the Eurozone could be contained. He held no leverage over her.
Maybe Tsipras turns on the printing presses and starts churning out drachmas again, but are they
going to be worth anything? And who would buy Greek bonds? Greece’s choices are between
terrible and terrible-er. In fact, the terms now being offered to Greece are more punitive than the
ones the Greek public rejected in the referendum last weekend.
A more cynical writer could accuse Merkel of annexing Greece, but doing it in a more subtle
way than Russia in Crimea. She forced out the finance minister last week, so can Tsipras be that
far behind? How does he take the new twelve conditions back to the people of Greece and say
“we surrender”?
And if Greece does not accept the austerity measures and the transfer of sovereignty political
stipulations, it will be put in time out. Literally. The eurogroup document actually says that if
Greece does not accept the terms on Monday, it should be swiftly put in a euro timeout.
To complete the analogy: Greece asked for its bike back and Merkel just delivered a nasty
uppercut, sending Tsipras flying through the air. I can even see Draghi standing over him,
saying “You got knocked the f%ck out!” Now she’s confronting the rest of the Eurozone, “who
else wants a piece of Debo?! Who else?!?!” They don’t. And for good reason.
Raise your hand if you want to leave the ECB right now? Hey Ireland, you all comfy wrapped
up in that ECB towel, relaxing by the pool? What happens to your 1.67% yielding 10yr without
an explicit ECB backstop? Italy – you think you keep a 2% handle without an ECB backing?
Please. Merkel just sent a very strong message to the entire Eurozone by making an example of
Greece.
I’m not sure there are any real deadlines at this point, but six of the aforementioned twelve
conditions must be enacted by Wednesday just for talks to continue. Those first six conditions
include tax and pension reform, the most important to the Greek people. Can you picture our
own Congress passing anything in three days? Me neither.
If those conditions are not law by Thursday, Greece is probably out of the euro. But if those
requirements are enacted, on Thursday the German Parliament will meet to mandate Merkel to
continue negotiations on a Greek bailout. Those could stretch on through the weekend or longer.
Without a bailout, Greece will likely default on its ECB bond redemption payment on July 20th,
effectively forcing the nation into bankruptcy. The ECB will have a tough time keeping its ELA
in place with the nation in default, and the Greek banking system will collapse overnight.
Of course, none of that seems to matter here as rates were up quite a bit across the curve on
Friday, as markets figured Tsipras was boxed in and even if Greece leaves the euro, the damage
will be limited to everyone except the Greeks. The next key level higher is 2.50%, while the
next major bottom is 2.15%-ish. Yellen reiterated her plans to hike interest rates this year,
although dire news out of Greece could certainly give our Fed the cover fire needed to remain
accommodative.
One way or another, it’s going to be an interesting week. And please don’t forward this on to
Angela Merkel.
Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an
official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory
capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject
to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable
law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax
advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express
written permission of Pensford Financial Group, LLC.
July 13, 2015
______________________________________________________________________________
At what point do I just hang out a sign that reads, “Check back after Greece is figured out”? As
long as domestic data doesn’t tank, the only headlines that matter are those out of Greece. I have
no idea how this is going to play out, but I know one thing – there are few people in the world I
want to upset less than Angela Merkel. I am starting to think she’s got the financial prowess of
Paul Volker, the stubbornness of George W., the marionette strings of James Bond’s boss, M,
and the intimidation factor of Debo (it’s too bad only six readers just got that last one). I don’t
want to ever cross her, and you shouldn’t, either.
For example, I (along with most) criticized the last two rounds of Greek bailouts because it was
so painfully obvious that Greece could not meet the repayment terms. I don’t run a research firm
with an unlimited budget to help ferret out nuggets of info like this, so that tells you how
transparent those deals were.
But while I cried “kicking the can down the road”, Merkel and crew were shifting bad Greek
debt out of private hands and into public hands (read: central banks). It was like a Cash for
Clunkers bailout where the trade in was Greek bonds. Had a Grexit surfaced then, imagine the
potential financial collapse. It could have rivaled the 2008 collapse.
But it never materialized, because Merkel was telling the ECB to backstop all peripheral debt.
So while I was bitching and moaning about enabling Greece like a spoiled child, Merkel was
biding her time, shoring up balance sheets, preparing for a showdown where Greece’s only
leverage would be stripped and a bluff could be called.
Greece’s only play, EVER, has been to take the Eurozone down with it. Merkel knew this and
made preparations for the showdown. When Tsipras called for the referendum, he played his
final card. He went all in, and Merkel called his bluff. She called it because Greece had been
isolated and the damage to the Eurozone could be contained. He held no leverage over her.
Maybe Tsipras turns on the printing presses and starts churning out drachmas again, but are they
going to be worth anything? And who would buy Greek bonds? Greece’s choices are between
terrible and terrible-er. In fact, the terms now being offered to Greece are more punitive than the
ones the Greek public rejected in the referendum last weekend.
A more cynical writer could accuse Merkel of annexing Greece, but doing it in a more subtle
way than Russia in Crimea. She forced out the finance minister last week, so can Tsipras be that
far behind? How does he take the new twelve conditions back to the people of Greece and say
“we surrender”?
And if Greece does not accept the austerity measures and the transfer of sovereignty political
stipulations, it will be put in time out. Literally. The eurogroup document actually says that if
Greece does not accept the terms on Monday, it should be swiftly put in a euro timeout.
To complete the analogy: Greece asked for its bike back and Merkel just delivered a nasty
uppercut, sending Tsipras flying through the air. I can even see Draghi standing over him,
saying “You got knocked the f%ck out!” Now she’s confronting the rest of the Eurozone, “who
else wants a piece of Debo?! Who else?!?!” They don’t. And for good reason.
Raise your hand if you want to leave the ECB right now? Hey Ireland, you all comfy wrapped
up in that ECB towel, relaxing by the pool? What happens to your 1.67% yielding 10yr without
an explicit ECB backstop? Italy – you think you keep a 2% handle without an ECB backing?
Please. Merkel just sent a very strong message to the entire Eurozone by making an example of
Greece.
I’m not sure there are any real deadlines at this point, but six of the aforementioned twelve
conditions must be enacted by Wednesday just for talks to continue. Those first six conditions
include tax and pension reform, the most important to the Greek people. Can you picture our
own Congress passing anything in three days? Me neither.
If those conditions are not law by Thursday, Greece is probably out of the euro. But if those
requirements are enacted, on Thursday the German Parliament will meet to mandate Merkel to
continue negotiations on a Greek bailout. Those could stretch on through the weekend or longer.
Without a bailout, Greece will likely default on its ECB bond redemption payment on July 20th,
effectively forcing the nation into bankruptcy. The ECB will have a tough time keeping its ELA
in place with the nation in default, and the Greek banking system will collapse overnight.
Of course, none of that seems to matter here as rates were up quite a bit across the curve on
Friday, as markets figured Tsipras was boxed in and even if Greece leaves the euro, the damage
will be limited to everyone except the Greeks. The next key level higher is 2.50%, while the
next major bottom is 2.15%-ish. Yellen reiterated her plans to hike interest rates this year,
although dire news out of Greece could certainly give our Fed the cover fire needed to remain
accommodative.
One way or another, it’s going to be an interesting week. And please don’t forward this on to
Angela Merkel.
Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an
official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory
capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject
to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable
law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax
advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express
written permission of Pensford Financial Group, LLC.
