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Market Uneasy Ahead of German Bailout Ruling

Looking for certainty? A German court ruling tomorrow (Wednesday) is likely to only muddy the waters.

Tomorrow, before the opening of U.S. trading, the German constitutional court is expected to rule on a legal challenge against last year's Greek bailout.

A surprising number of traders think some curveball will be thrown, but German media seem to believe that the deal is already done: the bailout is constitutional, but further bailouts must be approved by the German parliament.

Unfortunately, a ruling along those lines creates considerable uncertainty.

The German newsmagazine Spiegel has reported the deal as a fait accompli:

"The parties represented in the Bundestag, the lower house of the German parliament, have agreed on the following procedure: The German representative at the bailout fund, the European Financial Stability Facility (EFSF), will only be allowed to permit new credit if the Bundestag has approved it — otherwise he will have to veto any new aid. Other important decisions to be taken by the EFSF, such as the purchase of governments bonds, will also have to be approved by parliament. In addition, the parliament's budget committee will monitor the operations of the fund."

Why does this have traders worried? Because everyone knows there will have to be many other bailouts and modifications coming — and if every one requires a vote of the German Parliament, the political risk becomes very high.

First, as the German Finance Minister, Wolfgang Schauble, has noted, the EFSF will never be able to react fast enough if it needs to wait for the German Parliament to vote every time it needs to spend money. Second, the Germans will certainly get weary of vote after vote. You're either in, or you're not.

But that's the point: the Germans — and the rest of the northern Europeans — still don't quite know if they want to be in, or not.

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