Merkel To Push The Euro Zone Off The Cliff

It looks like this crisis is going to go all the way. Angela Merkel’s much trumpeted statement yesterday turned out to be another exercise in procrastination, as her mendacious double-faced strategy over Greece – tough at home, consensual in Brussels – is falling apart.

It seems that she is desperate to delay any decision beyond the May 9 state elections in North-Rhine Westphalia, the writes. This deadline give the capital markets another days of one-way speculation. Yesterday Greek two year bond yields rose 300bp to 13.5%, the highest short-dated yield of any country in the world – higher than those of Argentina (8.8%) and Venezuela  (11%).

Investors are now in effect pricing in a government default amid concerns that a rescue package co-financed by the euro area and the IMF could still fall apart.

Greece has €8.5bn of bonds coming due 10 days after the regional election. It is likely that a solution is hammered out only in the very last moment.

Marco Annunziata, chief economist of Unicredit Group, wrote yesterday to his clients:

“It is extraordinary that a euro zone member country finds itself a mere three weeks away from a potential default, with a clear possibility that uncertainty will only be resolved at the last minute.”

Investors said that the Greek bond market was now in effect pricing in a government default as two-year bond yields were trading more than 12 percentage points higher than German Bunds, Europe’s benchmark market.

Nigel Rendell, senior strategist at RBC Capital Markets, said: “Greece is now trading like the weakest emerging markets.”

As soon as Athens reached agreement in its negotiations on a three-year austerity programme with the IMF, the European Central Bank, and the European Commission, Germany would set in train legislation to back it with a loan from the other 15 eurozone governments, Ms Merkel says.

Investors, however, voiced fears that Greece may ultimately fail to deliver the tough spending cuts and tax rises needed to put its public finances on a more stable footing.

The stock market in Athens fell nearly 3 per cent, according to the Financial Times.

European leaders raised the pressure on Germany to decide quickly whether it would provide its share of aid under the joint euro zone and IMF rescue plan.

Christine Lagarde, France’s finance minister, said that time was “of the essence” in setting the final terms for Greece, Reuters reported.

Angela Merkel, German chancellor, sought to reassure German voters and the financial markets that her government would defend the stability of the euro at all costs, while insisting on tough conditions for a multibillion-euro loan to Greece.

“Germany feels an enormous obligation to guarantee the stability of the euro,” she declared in an impromptu press conference from her office in Berlin.

Dominique Strauss Kahn and Jean Claude Trichet have been asked to brief members of the German parliament on Wednesday to try to win their approval.

This will not be an easy task, as all parties except the Greens ask for more conditions attached ahead of an important regional election.

See Spiegel online for the parties’ positions on a Greek bailout.

More Social Unrest

In Greece, strikes and demonstrations started again on Monday with a 24-hour walk-out by Greece’s shipping unions disrupting ferry services to more than 50 Aegean islands.

Public transport in Athens will shut down for six hours on Tuesday when workers stage a protest against pay cuts, the FT reports.

Contagion to other bond markets

There were signs that the Greek crisis was spreading to other countries as Portugal, Ireland and Spain, the FT reports.

Portuguese two-year bond yields rose more than three-quarters of a point to 3.985%, Ireland’s jumped by a similar amount to 2.99% and Spain’s increased a quarter of a point to 1.87%.

Rescue Package ad Absurdum

The leader in FT Deutschland says that German politicians act irresponsible when they call for a haircut.

It would lead the Greek rescue package ad absurdum and could push Greece into insolvency they so desperately want to avoid and prove contagious for other E.U. countries.

“For the purpose of the aid package for Greece is just to assure the buyers of government bonds that they back their money.  Otherwise, banks, insurance companies and other professional investors had not the slightest reason to buy Greek bonds.  And by the way, no Portuguese, Spanish, Irish or Italian government bonds,” the FT editorial writes.

Holger Steltzner in the Frankfurter Allgemeine, meanwhile, called Merkel’s argument for a Greek bailout, – not for the sake of Greece but for the euro stability – a fake.

He warns that the German government will lose the regional elections if it bows to external pressure and make a bailout that benefits financial institutions at the expense of the German taxpayer.

(Steltzer had earlier suggested that Greece should leave the euro).

Chief Editor of Kathimerini Alexis Papathelas asks whether his country is up to the task. Greece needs still needs to convince the public of the efforts that need to be undertaken.

He is cautiously optimistic that Greece will finally get there but concerned about the poor public dialogue and populist attempts to  blame it all on speculators.

“Blame it on the speculators” – seems to be the new mantra of Europe.

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