Trader Talk

Is Merkel Too Comfortable With Greek Default?


Austerity watchers take note: the Prime Minister of Romania resigned today (Monday), the latest European leader felled by anti-austerity fury.

A European Union, left, and a Hungarian national flag, fly outside the Magyar Nemzeti Bank, Hungary's central bank, in Budapest.

Romania was the receiver of a 20-billion euro loan in 2009, on condition of deep austerity cuts.

The euro has rallied on headlines that Greek politicians are getting down to the nitty-gritty, with reports they may be willing to cut 15,000 public sector jobs as part of the austerity package.

But the talk over the weekend was about the key player, Angela Merkel: is she more comfortable with letting Greece default?

Oh, she protests, telling German TV today that they will not allow a Greek bankruptcy.

But at the same time she is digging in her heels: she has insisted it's time for Greece to decide on whether they want in or out. No money without an austerity agreement, and all parties must sign off.

It's not just Merkel insisting on getting the Greeks to agree on a painful austerity budget. She has also floated a trial balloon for the EU to take over control of the Greek budget.

The Greeks, obviously, do not want to do that. They may simply choose to default. Surely Merkel must understand that the probability of a default has risen.

Merkel seems to be calculating that a Greek default might not be all that disruptive. The stock and bond markets seem not to be so worried, and the banking system is certainly in stronger shape than it was three months ago. But is it sufficiently strong?

If all this is a comfort to you, you should hear the response of the inimitable Art Cashin, who, after I presented the above thesis to him, said: "Merkel may be increasingly comfortable, but they were all comfortable before Lehman Brothers."

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