The best analysis we’ve seen of the latest Greece debacle comes from Mike O’Rourke at BTIG.
Basically it boils down to this: Germany’s dithering has revealed the nation to be a second-rate world power:
The Euro’s weakness today helped keep a lid on activity here in the U.S. in equities and commodities. It made a quiet day even quieter. It figures that to find a group that makes Washington D.C. look like a well oiled machine, you only need to go as far as the squabbling and infighting among the political leadership in the Eurozone. If the EU leadership continues on its current course, they will manage to turn the Greek debt crisis into an all out currency crisis. The irony is that this is happening after the S&P removed the country from a negative ratings watch.
This comedy of errors is almost impossible to believe. We find ourselves among those who attribute much of the escalation of Greek fears to speculative activity. That being said, speculators did not design the Greek budget, or any other European nation’s budget for that matter. Germany is willing to squander time and public money to use its “intelligence agencies” to start surveillance operations of hedge funds. You really can’t make this stuff up. With such a mindset, these politicians wonder how they wind up with deficits. Remember the Warren Buffett smell test for Lehman Brothers detailed in the Valukas report last week, “… Buffett did not like that Fuld complained about short sellers. Buffett thought that blaming short sellers was indicative of a failure to admit one’s own problems.” Sending out your spies to perform cloak and dagger surveillance of hedge funds is akin to complaining about short sellers, but actually taking it multiple steps further.
The incompetence does not stop there. Yesterday, in a speech to German Parliament, German Chancellor Angela Merkel said “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.” When asked about the EU potentially expelling a member, ECB President Jean Claude Trichet said he would not comment on such “an absurd hypothesis.” That’s like Bern Bernanke calling something President Obama says “absurd”. With respect to Merkel’s statement, how can a group of nations come together for a single currency with standards, rules and restrictions and not have a mechanism to expel a nation? How can they police their members if there are no repercussions? Déjà vu? It is just like the regulators having resolution authority to wind down a systemic institution. At least the American excuse is that we have not had major financial reform in seven decades. The Euro is a relative infant.
The silliness does not stop there. Now Germany wants Greece to go to the IMF. We equate the Greek debt situation to a “stress test” for the Euro currency. Honestly, it is also one that should be passed fairly easily if there were only the smallest bit of leadership. If the EU members cannot keep it together under these circumstances, then forget about it when a real challenge arises. Sending Greece to the IMF will be a failure, and will likely be the beginning of the end for the Euro. It won’t be the end of the world, but the end of the Euro. It may take time to unfold but who would want to be in a currency for the long term when the largest threat is political officials and infighting creates a currency crisis because of poor leadership?
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 scary part about these events is that the world usually looks to the Germans for leadership on financial matters. U.S. investors generally have more confidence in German Central Bankers than the Federal Reserve. German leadership on this issue has been inconsistent, unclear and irresponsible. The Bundesbank aura is quickly fading away. 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. (Caveat: Watch out for the spies, hope the Germans don’t use renditions, and although we won’t provide a lawyer, we will testify on your behalf.)