Daily Forex Brief London: Friday 17th February 2012

Talking out of turn

Symptomatic of the huge political and financial stakes involved in the Greek debt impasse is the war of words between politicians in Greece and northern Europe. At such an incredibly sensitive and critical time, a verbal escalation is understandable on the one hand, but also very dangerous on the other. Prior to Wednesday's Eurogroup conference call, both Finland and the Netherlands were pressing for the next Greek bailout to be postponed until after the next election. Undoubtedly, yesterday's conversation would have discussed the escrow account-proposal that has been doing the rounds recently, and the possibility of giving Greece a bridging loan to cover the March bond redemption. In addition, leaders would have talked about how confident they were of the assurances given by various leaders of the major Greek political parties regarding the implementation of fiscal austerity measures. Some participants would have raised the issue of how damaging (or not) a Greek default would be at this time, especially as there are huge doubts over whether the very expensive debt-restructuring can be approved by the various national parliaments in time. Frankly, it looks very unlikely that the second bailout and the Greek restructuring will go ahead in the near term. The timetable is too tight and the political will in the North is fracturing. The fudge option, namely giving Greece a 'cheap' but binding bridging loan to get it through this next bond repayment looks increasingly likely. Europe could then delay (again) consideration of further bailout funds and debt restructuring, and/or contemplate more seriously whether it is prepared to cut Greece loose. Needless to say, the acrimony between both sides renders the whole situation even more unstable than before and more frightening for investors. If Greece does tip into default only the naive could claim that the likes of Portugal, Spain and France would not be adversely affected.