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Draghi Needs Greece Out To Succeed!

  • Written by Syndicated Publisher No Comments Comments
    August 28, 2012

    Merkel said that Greece was going to stay in the Euro on Friday:




    Hollande said the same thing on Sunday:



    Merkel added that all of the folks who have a seat at the table just shut up about Greece (This was a weird one to me):



    I don’t get it.


    To “fix” Greece, Greece must decouple from the Euro. There is no other option. It is only a question of when, how much it will cost and whom will pay. The EU deciders know that this is true; they just don’t admit to the reality in public. An important question to ask:


    What are the implications to Mario Draghi/the ECB of “Merkande’s” public support for Greece staying with the Euro (and dying) for a few more years?


    Draghi changed the game on 8/2 when he put the issue of “convertibility” (the risk of a return to legacy currencies) on the table. Markets have been reacting ever since he drew a line in the sand with these carefully chosen words:


    Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.


    Draghi shouts out:


    “Don’t worry! No current member of the EU will leave! There will be no Euro breakup!


    How can Mr. Draghi eliminate the risk of convertibility in the EU when the weakest sister in the EU has to be kicked out for its own good? “He can’t”, is the answer. Not when everyone (including the IMF) agrees that sustaining the Greek Euro link is impossible (and harmful to all).


    As long as Merkel and Hollande talk nice about Greece, the convertibility issue will hang in the air. The market will continue to fret:


    “What happens when Greece goes?”


    “When Greece goes, does that mean Spain will too?”


    The issue of Greece’s status must be resolved before the question of convertibility for the rest of the EU members can be laid to rest. Draghi can’t eliminate the risk until Greece is out, and the resulting fallout is contained.

    Draghi is a market savvy guy. He knows he can’t stand in front of the capital markets and succeed unless he has a credible position that can be defended. Greece is the broken wheel of his cart. It has to be jettisoned before the other wheels have a chance to prove they can roll on their own. He says he wants to reverse the market psychology on convertibility risk, that can’t happen until Greece is gone.

    The EU political leaders are screaming, “It’s all, or nothing!” That stance takes the cards out of Draghi’s hands.

    Images: Flickr (licence attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.