Eurozone

€65 billion—20% of GDP—have been yanked out of Greek bank accounts, and political positioning for the “afterwards” has begun....

It is not shaping up to be a pleasant weekend for Greek finance minister Evangelos Venizelos, who as a reminder until June 17, 2011 was the Greek defense minister and likely the man responsible for buying up all that European military equipment (with whose money nobody knows), or his boss, G-Pap successor and former ECB VP Lucas Papademos. The reason is that Greece is scrambling to reach a deal with the Troika that permits the €130 billion second bailout to be disbursed (unclear how the €15 billion add on would be theater), yet a key precondition of Troika demands is labor reform (a cut of the €750/month minimum wage, and various headcut reductions across the nation), which however as reported yesterday has seen all three coalition cabinet member throw up on. In other words, Greece has about 24 hours to do the impossible, unless of course it simply delays and does nothing once again. Alas, the real issue is that unlike before, there is a hard deadline of a bond maturity cash outflow on March 20, and absent resolution, which especially on the PSI issue should come far in advance as an exchange offer takes at least 6 weeks to finalize, there will be no deal. So while this weekend may come and go, without anything being resolved, the days can kicking, as Zero Hedge said back in January, are ending.

A one-stop shop summary of bullish and bearish perspectives on this weeks news, data, and markets.

What the heck is going on in Europe, and why are the peripheral countries putting up with it?

It appears that Greece will not even have to wait until the dreaded March 20 funding D-Day. As was earlier reported, Greek PM Lucas Papademos may resign if he is unable to persuade his coalition unity government to agree to further Troika demands for additional austerity. It now appears that there will be no agreement, and thus the primary demand from the Troika for further cash disbursement will not be met. The FT reports: "All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default. Representatives of the so-called “troika” – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue. But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs." Now we have been here before, and as a reminder the last time Greece threatened to pull out of Europe with the G-Pap referendum threat back in the fall, G-Pap was promptly replaced with the Trilateral Commission member and former ECB Vice President, Lucas Papademos. The problem is that for him to obtain power, he needed to form a coalition government. Well, that now appears to be in tatters, as not one party is willing to break to the Greeks that the minimum wage of €750 will be cut even further. The question is who will blink first this time, as it is quite likely that neither the Troika nor Greece want an out of control default. Unless, of course, this was Germany's plan B to the imposition of a Greek commissar all along...

Daily news.

• Greece's Hazardous Road to Restructuring (WSJ)
• Spain Coaxes Banks to Merge to Purge Losses (Bloomberg)
• Brussels Discovers New €15bn Black Hole in Greece's Finances (Guardian)
• UK Recession Predicted to Return (FT)
• Senate OKs insider trading curbs on lawmakers (Reuters)
• China Limits Mortgages for Foreigners (Bloomberg)
• Villagers scramble for fuel in Europe's big chill (Reuters)
• SNB Head Warns of Political Fallout After Crisis (FT)
• Portugal Bond Rout Overstates Greek Likeness (Bloomberg)
• Bernanke Says He Won’t Trade 2% Inflation-Rate Target for More Job Growth (Businessweek)

Stop us when this sounds familiar: 'While we expect central banks globally to continue to provide liquidity, it is the ECB’s position that has changed the most dramatically. The relative expansion of the ECB’s balance sheet is EUR bearish in our view....the liquidity being generated by the ECB is to a large extent absorbed by the bank refinancing process, hence the large deposits at the ECB. Although there is clear evidence that some of the funds have been used in the peripheral bonds markets, helping to stabilise sovereign yield spreads, lending into the real economy remains constrained. We believe that the relative performance of money multipliers will be a significant driving force for currency markets in the coming year. We see the ECB liquidity as a negative for the EUR" At this point the preceding should remind our readers, almost verbatim, of this Zero Hedge post from January 31, "Reverting back to our trusty key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a proportional Fed response, the fair value of the EURUSD would collapse to a shocking 1.12 as the ECB's balance sheet following this LTRO would grow from €2.7 trillion to €3.7 trillion." And the reason why the latter extract should remind readers of the former is because it is the basis for the just released conclusion by Morgan Stanley cutting its EURUSD price target from 1.20 to 1.15.

With the world ever more lethargic daily, as if in silent expectation of something big about to happen (quite visible in daily trading volumes), it is easy to forget that just about a year ago the Mediterranean region was rife with violent revolutions in virtually every country along the North African coast. That these have passed their acute phase does not mean that anything has been resolved. And unfortunately, as BMO's Don Coxe reminds us, it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix. As Coxe says: "Today, the Mediterranean is two civilizations in simultaneous, rapidly unfolding crises. To date, those crises have been largely unrelated. That may well be about to change." Coxe bases part of his argument on the same Thermidorian reaction which we have warned about since early 2011, namely the power, social and economic vacuum that is unleashed in the aftermath of great social change. But there is much more to his argument, which looks much more intently at the feedback loops formed by the divergent collapsing economies that once were the cradle of civilization, and this time could eventually serve as the opposite. To wit: "The eurocrisis has been front and center for nearly two years, during which time the economic and financial fundamentals have continued to deteriorate. “The Arab Spring” came suddenly, in a series of outbursts of optimism. It may have come at the worst possible time for the beleaguered nations of the North Shore. The Mediterranean has entered one of the stormiest periods in recorded history. It is the major contributor to risk in global equity markets. It is too soon to predict how these crises will end. The Cradle of Civilization is rocking amid an array of winds and storms. “The Arab Spring” ...may have come at the worst possible time for the beleaguered nations of the North Shore."

All you need to read.

Get out Greece! Get out right now! You should have moved two years ago; you missed that chance, but now it is much better than later. Summer vacations are being planned while we speak, you must move fast to get the biggest advantage out of bolting from the euro. Don’t let the next global recession bare its teeth. Investors still have money and they are interested in buying your assets when the prices are knocked down – each day you wait their value is deteriorating and you are looking more desperate. Most important: don’t listen to the naysayers in Brussels who are warning you of disaster outside of the ‘protective euro blanket.’ It’s much better outside, even the Turks know this.

European Indices are sliding following comments from EU’s Juncker that Greek PSI talks remain “ultra-difficult”, despite earlier gains following comments from the Chinese Premier considering further contributions to the EFSF and the ESM. The Basic Materials sector is outperforming others amid news of a possible merger between Glencore and Xstrata, causing shares in both companies to trade in strong positive territory ahead of the North American open Oil & Gas are one of the worst performing sectors in Europe today, with Royal Dutch Shell shares showing the biggest losses following disappointing corporate earnings. Elsewhere, S&P released a report suggesting Eurozone recession could end in late 2012, forecasting 1% GDP growth for the Eurozone in 2013, however these comments were not followed by significant European index movements. In terms of fixed income securities, Spain held a well received bond auction earlier in the session, with all three lines showing falling yields and strong bid/cover ratios.

• Merkel Seeks to Reassure China (FT)
• German-IMF Rift Stalls Greece Deal (WSJ)
• Survey of Banks Shows a Sharp Cut in Lending in Europe (NYT)
• Bernanke to testify on economy and deficit (AP)
• House votes to freeze congressional, federal pay (WaPo)

With harsh long-term consequences for the heavily indebted countries.

You're about to hear a big boom come from across the Atlantic, but I've yet to hear a peep from the rating agencies. And many of you guys think they were delinquent during the other credit bubble!!!????