Debate over Greece Rages On

The German paper Bild reported that Germany may be willing to make a lump aid payment to Greece of 44 bln euros.  This popped the euro up a little more than half a cent to the session high just below $1.2730.

Color me skeptical.  To give Greece such a large sum at once is counter to the underlying strategy of doling out the aid in tranches to provide assurances of compliance.  This is tantamount to unilateral disarmament by the creditors.  Second, three euro area members require parliamentary approval, Germany, Finland and the Netherlands.   It is unlikely to receive support. 

Recall that previously German Finance Minister Schaeuble proposed paying Greece's aid into an escrow account to ensure the orderly servicing of its debt.  The Bild report may not be inconsistent with this.  In any event, what will eventually be agreed seems to certainly not be as straightforward as the Bild story and dramatic market response would suggest.   

Moreover, market participants should not let the Bild story paper over the real development from the eurogroup meeting which is that the Troika is not the united front of creditors that it once was.  The IMF has broken with the unrelenting push toward austerity and now insists that the two-year extension for Greece does not mean that the 120% debt/GDP, working definition of sustainability gets pushed out to 2022.    The euro zone finance ministers apparently think otherwise.  

What is at stake is how to find the roughly 32 bln euro or so that Greece is projected to need to extend to 2016 when it spends only 2% more than it collects.  The IMF wants the official sector, but not it, to take a haircut.  However, euro zone finance ministers are more inclined to lower interest rates and extend maturities, which is a tactic that has been deployed for Greece twice since 2010.   

European finance ministers are loathe to do two things:  commit any fresh funds to Greece and take a haircut on existing loans.  It will prove difficult to square the circle. 

The euro has pared its gains.  Initial support is now seen just below $1.2700.  A break signals another test on the $1.2650 retracement objective.