Busch: Three Week Euro Scenario
There are two known dates and one unknown date that will cause volatility and uncertainty surrounding the Euro. All three will likely occur in the next three weeks.
May 9th is the election date in the most populous German state Rhine-Westphalia.
This mandates that German PM Merkel drag her feet on a bailout of Greece. A bailout is very unpopular and Merkel will lose important seats in the Bundestag if she strongly supports the bailout.
May 16th is the date when E8.5 billion of Greek debt needs to be rolled over.
With Greek 2yr notes yielding 14.5%, Greece can’t afford to refinance at these yields.
They will need to get access to cheaper funding supplied by either the European Union or by the IMF. While the situation looks dire at this point, it is likely they will get the funding and it’s likely the IMF will supply it.
This is the simplest and cleanest solution.
Also, experts from the IMF, the European Central Bank and the European Commission have been at the Finance Ministry in Athens, combing through budgets, balancing receivables against outstanding obligations and appraising the effects of the austerity program on the Greek government. According the German magazine Der Spiegel, It is considered highly likely that they will encounter the occasional surprise.
“The tip of the mountain of debt, say insiders, probably hasn't been discovered yet.”
Currently, the Euro is trading around 1.3300 and has been since the end of March.
In three weeks time, this situation must be resolved by either an IMF led bailout or by Greece defaulting/restructuring. This means that a large move of 5-10% is also likely up or down as the two outcomes mandate a large move.
Given the large dichotomy of outcomes, the Euro can not remain at these levels.
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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.