Berlusconi Main Squeeze Merkel Sends Mixed Messages: Says Eurozone Insolvency Is Possible But Greek Default Would Be Comparable To Lehman

In a surprisingly candid yet traditionally schizophrenic interview on ARD 1 show GuntherJauch, Angela Merkel once again sent the same mixed messages that have forced Berlusconi to smile to her face while saying less than flattering things, ahem, behind (no punt intended) her. While on one hand she said that default is an option under the post-2013 Euro rescue fund and emphasized that a euro-area sovereign insolvency can not be ruled out, she also made it clear that Europe continues to have no Plan B. According to Reuters, "allowing Greece to default on its debt now would destroy investor confidence in the euro zone and might spark contagion like that experienced after the bankruptcy of Lehman Brothers in 2008, German Chancellor Angela Merkel said on Sunday." Obviously this is not new, and our humble interpretation is to continue to telegraph to the market how unstable the Eurozone is so there are very little expectations and more EUR short squeezes can be accomplished, as well as not pricing in anticipation that emergency liquidity conduits, currently being implemented, actually succeed in case they actually do. Of course, should Europe really succeed in ejecting Greece without Europe imploding which is the interim end game here that would certainly send the EURUSD to well over 1.50. Alas, we put chances of that happening at about 1%.

More from Reuters:

"We need to take steps we can control," Merkel said, drawing a parallel between the Greek situation and that of Lehman, whose bankruptcy helped trigger the global financial crisis.
"What we can't do is destroy the confidence of all investors mid-course and get a situation where they say that if we've done it for Greece, we will also do it for Spain, for Belgium, or any other country. Then not a single person would put their money in Europe anymore."

In a one-hour interview on the euro zone crisis with the popular German talk show host Guenther Jauch, Merkel said she relied on the view of the International Monetary Fund (IMF) when assessing how to handle Greece.

As long as the IMF was convinced Greece's debt was sustainable, then she supported that position, she said.

As for the key event of the coming week, which is German ratification of the expanded EFSF, in this case Merkel is setting the expectations bar quite high by saying it is guaranteed:

Merkel also made clear that she did not view a parliamentary vote in Germany on Thursday on the euro zone's rescue mechanism as "make-or-brake" for her government.

Because opposition parties support giving new powers to the so-called European Financial Stability Facility (EFSF), passage is not in question.

Too bad there is no such thing in Europe as guaranteed. And should the German vote actually fail, look for the EURUSD to tumble a good 1000 pips in a few seconds. It may be prudent to hedge for just that possibility...