In Greece, wise men speak and fools decide

In Greece, wise men speak and fools decide - George Santayan

Tonight Greece will continue the cat-and-mouse game with the Troika, accepting the firmer austerity conditions in order to secure the next payment before the March deadline, but it is not going to be the final word in this Greek debt crisis as the drama will develop into a full blown Greek Tragedy by May/June. The meeting of the Cardinals (an EU “summit to end all summits” due to a real fears of systemic meltdown) is still our macro forecast for the EU.

As the Greece confrontation threatens in the background, the ECB has been buying time. The next LTRO end of February could not come at a better time, and the changes to the ECB board that happened at the end of 2011 and secured the current round of money printing were key in keeping a lid on the EU pressure cooker. By the end of February, the ECB balance sheet will most likely be 35-50 per cent of Europe's GDP - no small change considering that most people still believe the money printing has yet to really get under way.

Traditionally, Greek tragedies were performed in late March/early April at an annual state religious festival in honour of Dionysus. He was the God not only of the grape harvest, wine making and wine, but also of ritual madness and ecstasy in Greek mythology. And come spring, it appears we may be in for a visit from Dionysus, as it seems to me that the market and many observers have missed at least three critical aspects of what has transpired recently:

The last EU Summit was politically significant, but not economically
Chancellor Merkel was the only winner at the latest EU Summit. Even the Der Spiegel headline read: Merkel gets her fiscal pact. The deal gives her some political legitimacy to return to Berlin and ask for more money for the Europe project.

Germany has always embraced Europe in the last minute on the last day. Merkel is betting that a finite amount of further financing for Europe will do the job to make the debt crisis go away. I doubt that. In my opinion only a full blown support for Euro-bonds and hence unlimited support from Germany will be able to create the needed firewall to protect first Portugal, but later also Spain and maybe Italy. Sometimes, small gradual steps aren’t wise or prudent, especially in a potentially systemic crisis.

Germany’s critical moment is fast approaching. How Merkel and Germany decide to move forward will dictate not only the losses that will be taken, the size of Europe and its future direction. The Euro Zone and the Euro were designed with critical flaws and the new fiscal compact did not alter this, but it did create a precedent that has only France and Germany making decisions for all of Europe. This is hardly the best set-up for making long-term solutions for the remaining 25 countries in Europe.

Nothing doing until after the French election
More often than not economic events are driven by political time-lines. So it is important to note that no more critical EU decisions can be taken until the first round of the French election on April 22nd.

So, the ECB can plug a way with its stop-gap liquidity measures for a time, but I do not see any political changes to the extend-and-pretend policies of Europe before the election, as Sarkozy will do anything in his power to encourage the idea that he is the only viable choice for securing not only France's but also Europe's future. The problem for him could be that he made similar promises in 2007 to the French voters and this time they are once bitten twice shy in voting for him.

Reuters has an excellent analysis of Sarkozy and his failed promises in the article: Rebranding Sarkozy: Too sullied a sell for 2012? The overspending by Sarkozy is becoming a real issue. New economic reports show it will take at least ten years for France to balance its budgets - (Do not mention the fiscal compact conditions please!) - and even the socialist economist Jacques Attali is now blaming Sarkozy for using debt to solve debt : "It was an absolutely huge mistake to think he could solve the crisis by increasing the public debt,". A realistic Socialist economist - Mon Dieu, mes amis!

The EU debt crisis is not an issue for the rest of the world
I am just back from a long trip to Russia, the Middle East, and China – the ideal clients to buy the European debt issuance. The only problem: the trip left me with a feeling that they do not really care or rather they correctly think that the EU debt crisis originates in Europe and hence should be solved in Europe.
The none-EU world has plenty to deal with on their own, although they have the relative luxury of merely having to worry about their excessive current account surpluses and how to make sure their domestic economies benefit.

Even Merkel's visit to China failed to create new common ground for Europe and China. Yes, she made it to the front page, but no there was not a single story about China committing to buying EFSF/ESM or any other bond from Europe. There were, however, plenty of articles about how Europe needed to start dealing with the crisis. Note the word: Start - as in they do not believe Europe has yet taken any credible steps to deal with its solvency issues. It seems Chinese bureaucrats and likewise the Russians agree that solving solvency issues by creating more debt is not going to work. First the most famous Socialist economist says it, now the biggest Communist Party of the world seems to say the same! It's a funny world indeed.

It is important for me to underline that I am very positive on the outlook for Europe: growth, employment and stock markets, but only once we have started dealing in realities and not in non-solutions based on printing more money. It may be a Greek tragedy we see on the front pages in the weeks to come but it will also be the start of something better - something new.

Safe travels,

Steen