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Market Brief
As widely reported Germany rejected the Greek six month loan proposal, suggesting it failed to honor any prior obligations. The German rational was that Greece was asking for cash but giving nothing in return. German wants a clear plan on how Greek will pay back its current debt load. There is still a chance that at today’s Eurogroup will overturn the German response or even less likely, convince Germany to reverse their view. Outside some halfhearted optimistic rhetoric (Finland) the ideological divide in our view is too great to find a compromise.

With the ECB extension and increase of the emergency liquidity to shaky Greek banks, negotiations can continue next week, should a special Eurogroup meeting get called. We suspect that a comprise will not be found and Greece will be force to leave. In short, by allowing Greece to default on its massive current debt burden is the only way Greece can achieve economic long lasting expansions that is culturally acceptable to the Greek people. The lack of contagion in financial markets (stress isolated in Greek yields and stock markets), suggests Europe could manage this extreme event. True there are some significant uncertainties with this type of massive structural event but we suspect that Europe is prepared to take this critical path now rather than in six months. First is that European growth is soft but stable getting a solid kick from the weak Euro. Second is that the market is full aware that “Grexit” is possible and has had plenty of time to manage the risk. But finally, the rise of the ECB in the last five years is now prepared to provide a strong hand to manage the transition and limiting disruption. ECB already scheduled launch of QE could be used to limited market blowback . While this strategy is clearly high risk it will clear the way for a stronger EU and lessen expected nation dissension(eroding confidence in EU). In addition, using recent examples of Lehman’s and Detroit there are blueprints on how to manage a strategically critical insolvency. This scenario would lead to EUR weakness but nothing extreme such as the SNB abandoning the EURCHF “floor”. We continue to seek opportunity to reload on EURUSD short positions

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