Three key economic themes

The key three current economic themes:

• Euro currency's survival looking more tenuous

• U.S. economic growth to remain weak

• Inflation concerns in the developed world, particularly in the U.S., are overblown

German sentiment doesn't bode well for Greek aid

As Greece is in negotiations with the IMF to determine terms on which it will access the joint IMF/EU funding facility, Germany's foreign minister said today that the German government has not yet committed to providing financial aid to Greece.

Germany's tough stance is founded in recent history: Unification imposed steep costs which are continuing, the German bank rescues were seen by many in Germany as a result of the Anglo-Saxon capitalism and hedge funds wagering against the markets. Fast forward to present: opinion pieces in prominent news outlets fume about US hedge funds and speculators saddling Germany with a Greek bailout bill. The German public is receptive to these arguments as overall economic literacy is low. The following opinion piece on Germany's most watched TV news show [translated into English] best captures the current mood in some quarters:

"In New York, some hedge fund managers are now celebrating in a champagne mood: Recently they met at a posh address in the city to debate how to bring the Euro via a Greece-crisis to its knees. It paid off: within a few weeks, they have succeeded, through new rumors and speculation, to exacerbate an already tenuous Greek situation and make it ripe for rich pickings. Now Greece has no choice but to capitulate as speculators have achieved what they wanted: to aggravate the situation so that the European Union now has to pay state aid and the euro massively losing value."

During the banking crisis, German politicians belatedly realized the contagion and provided state aid to German banks. There is no guarantee Germany will act timely this time where the problem appears further away. I have read little in the German press about the economic ramifications of a Greek default. The discussion has centered primarily on keeping the Euro and Eurozone intact as institutions which Germany was instrumental in creating. [NB: The introduction of the Euro in 2002 was greeted overwhelmingly with skepticism and the general public remains ambivalent about the common currency]. Instead of educating the public on the economics of a potential Greek default, politicians have been scoring points with "getting tough on Greece" rhetoric ahead of German state elections next month.

In summary, I expect the German government to continue dragging its feet, perhaps close to the mid-May date when Greek debt payments are due. A popular saying comes to mind: "Erst grübeln, dann dübeln" - first brood about the problem then plug it.  This will likely result in a deteriorating outlook for Greece's banking system and increased contagion risk (such as flight of bank deposits) in other periphery countries.

  

Current Greek bond indicators (as of 10:30am)

        2yr / 5yr yields: 13.1% / 10.6% (up 285bp / 113bp from Friday close). 5yr spread to Germany: 852bp (737bp on Friday)