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Monday, May 14

14th May - US Close: Exit Greece, Enter MerDe

The Eurogroup meeting is not going to give any real concessions to Greece. Greece cannot form a government. Greece has a large bond payment due on Tuesday, and if it pays it, the country has remaining funds for couple of weeks. Someone will soon blink and either the eurocrats cave in, or Greece agrees to have "technical assistance" to form a techno government, just like Italy has.

I still believe that Greece will exit the euro, but timing is uncertain - in couple of weeks or a year? The European banks have offloaded their Greek bonds to the ECB and EFSF, but would those two institutions be able to handle the losses now, especially politically as the Spanish bailout is around the corner?

Merkel and Hollande, or Merde, will meet on Tuesday, almost immediately after Mr. Hollande has been crowned as the new president. They will not be talking about golf or old Sven Väth dj mixes.

Elsewhere, the Spanish bond market crashed and burned, and the latest monthly balance sheet from Spain's central bank shows that the country is very dependent on Eurosystem financing and deposit flight is continuing. Greece is almost gone. It is not a major issue for German and French banks anymore. Spain is. The Merde will talk about Spain, and then they will call Super Mario in Frankfurt am Main.
So the real moment of truth comes if and when the ECB — or more accurately the Bundesbank, which may ultimately be on the hook — decides to pull the plug.             Paul Krugman / NYT

Markets – Between The Hedges
The Closer – alphaville / FT
Market Commentary – A View From My Screens
Tyler’s European Summary – ZH
  Iberia Implodes To 17 Year Lows As Stigma Trade +200%
Tyler’s US Summary – ZH
  rips and dips for the sixth day in a row
Morning Briefing (Asia) – BNY Mellon

Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
Tracking Europe’s Debt Crisis – NYT
FX Options Analytics – Saxo Bank
European 10yr Yields and Spreads – MTS indices

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Moody's Downgrades 26 Italian Banks: Full ReportZH

I don't know how this ends exactly, but one answer may be that the single-currency area will ultimately have the membership that markets find credible. That could mean a Germanic northern union or a complete break-up. It is quite unlikely to be the current configuration.

The Axis of Weeble is Definitely WobblingTF Market Advisors
Shorting Germany, preferably bunds, is my favorite way to play this (with French bonds a close second). I think the next leg if it occurs wipes out the myth of Germany as “safe haven”. If Greece goes, losses to the Troika will be real and any attempt to paint over them will be too obvious.

NeverlandDr. Ed’s Blog
Two charts: industrial production and stock markets of select European countries and some trashing:
Europe is a socialist’s wonderland. Actually, it’s more like where Peter Pan resides.

Rebalancing the EurozoneProject Syndicate
As long as the eurozone's internal divergence in unit labor costs persists, the euro crisis cannot be fully resolved, because current-account deficits and/or slow growth will continue to stalk the “south,” perpetuating worries about sovereign debt and commercial banks. But the burden of adjustment cannot rest solely on the south.

Jamie Dimon & Greece: Imperfect TogetherKotok / The Big Picture
The only player that can assist is the ECB.  It cannot fix an issue of solvency.  However, it can offset the pressures of illiquidity.  It has done so and will do so again.  We expect the ECB balance sheet to expand again by a large amount as it attempts to use additional liquidity to stave off collapsing markets.

Merkel and Hollande: you say growth, I say austerity, let’s call the whole thing off alphaville / FT
While the relationship has had an inauspicious start, the signs are that it will go well, at least initially. Both leaders find themselves under pressure at home, but they need each other.

Lloyds’s Mercuri Says Contagion Is Focus of Euro ZoneBB (mp3)

Five European Central Bankers Discuss Greek Eurozone Exit; Lies and Half-Truths from German Finance Minister; Message to Greek Politicians "No New Concessions"Mish’s
“I think Hollande knows that the fiscal pact can’t be renegotiated,” Schaeuble said. That is a lie as well and we will find out soon enough. Given the Crushing Defeat for Merkel's CDU Party in German Elections last weekend, Hollande will press even harder for what he wants: Eurobonds and a weakening of austerity measures.

Greek tragedyMacroScope / Reuters
Greece will obviously loom large over this evening’s meeting of euro zone finance ministers in Brussels. But so will Spain… If Spain is cut some slack then why not Greece?

Greece Euro-Exit Debate Goes PublicBB

Eurozone in 'very political' meeting on Greece and Spaineuobserver

Default now or default later? Wolfgang Münchau / FT
By following the EU-IMF programme, Greece will end up with 10 years of depression, an inevitable euro exit and a possible breakdown of democracy. The best option, in my view, would be a strategy to achieve a primary balance by 2013 and then to default on all outstanding foreign debt, public and private.

How Europe can force Greece to exit the euro Felix Salmon / Reuters
Felix argues that it is easier for Greece to just default on everything, including IMF loans – but because of its banking system it could not remain in euro.

Greece, euro exit and the drummer in the bandReuters
A year ago, it was nearly impossible to get a diplomat in Brussels to talk about the possibility of Greece leaving the euro zone. Now, it's the opening to most conversations.

The Market’s ‘Rationality Put’ is FailingMarketBeat / WSJ
If people begin to believe that Greece will soon exit the euro and the eurozone, as we noted last week, it could ignite runs on the banks. First in Greece then quickly Spain and Italy. Would there be a rush to things like capital controls? It’s hard to exercise a “rationality put” if things turn irrational beyond your control.

Exit and ExportsKrugman / NYT
Greece may have more opportunities than people realize.

Grexit and the euro: an exercise in guessworkalphaville / FT
Everyone who’s anyone (and some other people too) has a view on what will happen to the value of the euro if Greece makes an exit.

Will the Greek exit be voluntary or involuntary?Credit Writedowns
I believe Europe can ‘handle’ a Greek departure from the euro zone…the possibility of a more near-term or unilateral exit has increased.

Brinkmanship rhetoric hides cost of Greek euro exiteuobserver
Peter De Keyzer, chief economist at BNP Paribas Fortis, said both Greek and EU politicians "are bluffing." He and other economists say that the eurozone can survive a Greece exit but ask at what cost.

Last Call For Greek Parties?Open Europe
latest developments seem to suggest that new elections could, at this stage, be inevitable.

FFTW’s Johnson Says Greek Exit Would Be CatastrophicBB (mp3)

BizDaily: Greece - in or out?BBC (mp3)
The influential German news weekly Der Spiegel certainly knows what it wants to happen to the eurozone: "Adieu Greece" is the headline on the latest issue. The paper argues it's time to kick the country out of the euro. It seems a full scale confrontation is on the cards. So exactly how would Greece leave the euro? Business Daily has gone back to an earlier era of European confrontation to find out. We've taken a look at the challenges of changing currency - Pathe newsreel style. And Justin Rowlatt debates the intricacies of exit with Guntram Wolff of the European economic think tank Breugel and with Andrew Walker the BBC's Economics Correspondent. Plus - how do you know when you've met a truly powerful woman? It's pretty simple, according to our regular commentator Lucy Kellaway of the Financial Times.

Bank of Spain's latest balance sheet figures point to further deteriorationSober Look
Bank of Spain April balance sheetEconomy View

Is the sun setting on Spain as a brand?El Pais
The crisis has taken its toll on the country, leading to a resurgence of tired clichés about wine and flamenco and the punishment of Spanish companies abroad

Some chasm-like eurozone bond spreadsalphaville / FT
As Euro crisis intensifies again, Spanish yield is making new highASA
Nice bond charts

ELA stumble du jouralphaville / FT
€18bn mystery ELA. Luc Coene, Belgium’s central bank governor may have turned snitch on Portugal: “Of course in countries like an Ireland, Greece, Portugal, you can’t get out in the short time and it will take a little longer.” Portugal? I never mentioned Portugal.

RRR cuts ≠ credit easing. Keep saying it.alphaville / FT
an RRR cut is not so much a move to make more credit available as it is to avoid reductions in liquidity.

China’s economic data disasteralphaville / FT
China’s trade data for April came in well short of expectations on Thursday, and was followed by a raft of more disappointing data on Friday.

I Know What You Did This SummerThe Reformed Broker
Now these are just charts, reflecting what has happened and what is happening - not what will happen.  But the fact that we are slowly eating away at the gains of Q1 so early in the summer tells me everything I need to know about what we have in store.

It's An Interconnected World After AllZH
JPM: It will be hard for the world to grow if China depends on Europe which depends on China which depends on the US which depends on China and Europe. It’s an odd market: in the US, 98% of the S&P 500’s cumulative 27% return since January 2010 occurred either during corporate earnings season, or right after QE programs. The rest of the time, the S&P 500 is flat, since the economic news has not been that good.

The mysteriously falling US trading volumesalphaville / FT
Credit Suisse: …the influence of stock prices on volumes in detail, but we do find a strong inverse relationship between the two. So it appears that our good fortune of improving performance is offset by lower trading activity.

Hedge me up before you go, goDeus Ex Macchiato
P/L volatility hedges and tail hedges. The first looks better on paper, while the second works well in reality.

Previously today:
and during the weekend:
11th May - Best of The Week