Hope Springs Eternal

Global asset prices are on the mend on the latest expectations of a resolution to the Greek crisis. Greek Prime Minister George Papandreou took his show on the road to Berlin, hoping to convince policymakers in the heart of Europe that with just a little more money, Greece is ready to reform its profligate ways. Papandreou assured German business leaders that further bailout funds wouldn’t be an investment in the failures of the past, but in the future successes of Greece. Given the magnitude of those past failures, core-Europe remains understandably skeptical; worried they’d be throwing good money after bad.

The latest scheme calls for the €440 bln ESFS to be levered up to 8-times, to give the bailout fund more punch. This way, policymakers avoid having to ask EU member states to contribute more money outright to broadly unpopular bailouts of the periphery. Yet in employing leverage, they expose those member states to vastly greater risk. Leverage is very much a double-edged sword. Imagine the populist outrage if further bailouts — like the initial bailouts before them — fail to prevent an eventual default and the fiscal situations in core-Europe are decimated as a result. At that point, you have an even greater problem on your hands…or you gear-up to 32X and try again.

The German’s seem keenly aware of the risk with recent polls showing nearly 75% oppose pledging more money to debt ridden EU members. German Chancellor Merkel is walking the tight-rope in between her conviction that the euro must be saved and the political reality of the aforementioned polls.

Merkel said that Germany would provide “any support possible” to rebuild confidence in Greece, knowing full-well that there are indeed limits to what Germany is willing to do — or can do for that matter — as support within her own coalition continues to crumble. With a critical parliamentary vote slated for Thursday, there have already been reports from officials within Germany today that leveraging of the EFSF is off the table…if it was ever really on the table.

While the daily proclamation that “we have a plan” is growing tiresome, the charade has succeeded in buying time. Greece has yet to default even as CDS premiums have screamed for months that such an outcome is all-but assured. The troika will reportedly return to Greece tomorrow to resume their audit, but the market is getting increasingly impatient. In continuing to drag-out the Greek drama, the vested parties risk completely losing the confidence of the market, precipitating the very disorderly default that they are so desperately seeking to avoid.