It’s nearly 2:00 AM in Brussels, and a statement still hasn’t been put out by the European leaders in regards to a Greek bailout, but it’s worth taking a step back to consider some events prior to this evening.One analogy that’s been used over and over and over again in this whole fiasco is poker, and the market repeatedly calling Angela Merkel’s bluff. Her “bluff” was her claim that she would never bail out Greece.
Of course, in poker, having your bluff called isn’t a death-knell, so long as you bluff harder on the next card. You can keep bluffing and bluffing harder, giving yourself a chance to win, but also, of course, raising the odds that you lose a big honkin’ pot when the hand is over.
And that seems to be what’s happened.
Writes BTIG’s Mike O’Rourke:
Almost two months ago in a speech to the German Parliament, Chancellor Angela Merkel launched a veiled threat at Greece remarking “We need an agreement that as a last resort, it’s possible to exclude a country from the Euro zone if again and again it doesn’t fulfil the requirements.” At the time in our March 18th Bedtime, we criticised Merkel and described the Greek sovereign debt crisis as a “stress test” for the Euro currency. We noted that if not for the poor leadership, the currency should have passed the test easily. We also noted that there was a risk that Merkel was bluffing. a “There is the chance this is political gamesmanship. This also brings back déjà vu of the weekend of the Lehman bankruptcy. Are Merkel’s statements the equivalent to Hank Paulson’s bluff when his office leaked to the media that there would be “no government participation” in a bailout of Lehman (although had a buyer emerged the government would have helped)? This situation is different because these are different sovereigns, so one cannot expect that it is a bluff. If it is a bluff, it is truly irresponsible. In addition, we know Paulson’s hand did not play out too well.” The market now knows Merkel was bluffing as the German Parliament passed its portion of the EU-IMF aid package at the end of last week. Merkel’s bluff has not played out well either.
What’s the upshot of this bluffing?
She has succeeded in turning the sovereign debt challenges of a small EU member into a full blown currency crisis, and potentially, a global banking and stock market crisis. Nice work, as if it was worth the concessions she won from Greece. We concluded that note by commenting that “For all of those speculators out there, not only are the fundamentals of the Euro short on your side but (lack of) the political leadership this week risks creating damage to the currency that may be irreparable for some time. They are begging you to short this currency.”
Meanwhile, with every passing minute, the begging continues.
One thing to note is that we have no philosophical objections to Merkel’s intransigence at bailing out a neighbour. It’s not her job to give away German money to a country that acted irresponsibly. But if you’re going to take that stand, you have to take it all the way to the bank, and not give in at the end.
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