#Grelex

A political analyst noted,
On the day that Athenians voted,
That whoever's elected,
An exit's expected -
From euro to drachma demoted.

"Europe can exhale." So enthused the Munich-based Süddeutsche Zeitung after pro-European parties narrowly won the most closely watched Greek election in modern times. The radical-left Syriza Party, which wanted to reject the austerity measures forced on the country as a condition of continued eurozone membership and financial support, made a strong showing, if even in defeat. So, Europe stays together.

But, can the eurozone members collectively exhale? Despite the narrowly pro-European election result, the financial and political pressures on the Greek people remain immense, and the road to stability and prosperity is long and treacherous.

No Exit to Athens

Said the Austrian Minister Fekter,
Alarmed at a Greek exit specter:
"For leaving the 'zone,
The course is unknown"
(A point on which few would correct 'er).

"For Greece, any expert you dial up
On making a roadmap worthwhile up,
Most likely expects it
Is less like an exit
And more like a 20-car pile-up."

"If I go there will be trouble; if I stay it will be double."

So sang The Clash 30 years ago, in a eerie presentiment of the dilemma facing eurozone policymakers today. Should Greece stay in the euro, as Angela Merkel now advocates in a newly full-throated campaign? This would underpin European unity and lessen the contagion risk for Spain and Italy. It would also shackle the Greek economy to an overly strong currency and obligate the "core" countries to provide an indefinite flow of subsidies, as Hans-Werner Sinn, chief economist of Germany's IFO Institute, recently complained. And yet, the exit from the euro is not only uncertain and fraught with risk, it isn't even legal.

Thus, Austrian Finance Minister Maria Fekter told inquiring reporters flat out: "It isn't possible to leave the eurozone." Though such legal hurdles might be surmounted, experts who have studied the situation voice concerns about uncontrollable bank runs in Greece, as savers there fear the replacement of their euro nest eggs with cheaper New Drachmas. Indeed, such fears provoked the withdrawal of €700 million from Greek banks on Monday. It seems that the one thing that cannot be tolerated in the eurozone is more uncertainty.

"So you've just got to let me know, should I stay or should I go?"

Greece: Select Company

Said Standard & Poor's: "It's preferred
You remember your bond is your word;
When changing the payments
You've promised to claimants,
'Selective default' is incurred."

Greece joined a select company indeed when it became the first euro-zone country to be given a default rating. Standard & Poor's cut the country's long-term rating from CC to "selective default," as it had promised to do if Athens amended the terms of its bonds to add collective action clauses. The Greek CAC effectively forces bondholders to accept a bond swap offering. The measure, which was approved by the Greek parliament last week, could potentially forces bondholders to take losses, but up to now the country has not missed any interest payments; hence, the "selective" qualifier. If a majority of bondholders accept the amended bonds, the rating agency has indicated that it will set Greece's rating at CCC.

From Deep Pool to Bottomless Pit

When volume and confidence rise up,
Investors approvingly size up
The debt of a nation
In great circulation;
Less so when liquidity dries up.

Now that the Athenian contagion has spread to Rome, the thing that made Italy's sovereign debt so attractive - namely, the shear amount of it - has become a focal point for investor fears and issuer nightmares. At €1.9 trillion ($(2.6 trillion), Italy ranks behind only the USA, UK, Germany and France in the league table of sovereign debt. As the Wall Street Journal noted, big investors felt comfortable with Italian bonds, despite the country's 120% debt-to-GDP ratio, because they knew they could always sell their position. Suddenly, this is no longer true, and Rome must figure out how to roll over the next €300 million of maturing bonds, which the market now prices at over 7%.

Overheard at the G-20 in Cannes

"Monsieur Président," said Premier Hu,
"If the Greeks carry on as they do,
We would scarcely esteem
Your stability scheme,
Or the chance of financing it, too."

When President Nicolas Sarkozy, host of this week's G-20 summit in Cannes, met Premier Hu Jintao for dinner, he would have hoped to wine and dine the Chinese leader into backing the European Financial Stability Facility (EFSF) with some of his country's $3 trillion in foreign reserves. Instead, the entire project has been thrown into doubt by Prime Minister George Papandreou's call for a Greek referendum on his country's bailout. Alarmed that the referendum is likely to fail, European leaders have responded with an ultimatum, in the words of Chancellor Angela Merkel: "Does Greece want to remain part of the euro zone or not?"

A Greek Bondholder's New Haircut

To lessen the shame and defeat in it,
A bailout's got something to sweeten it,
So there's little regret
To sign away debt,
If, in any case, one would have eaten it.

Led by France and Germany, the euro zone has crafted the framework of an agreement to avoid a Greek default and provide a mechanism to stabilize the finances of its other overly indebted members. The announcement was greeted favorably by global equity markets, in spite of the provision that writes off 50% of Greece's foreign debt; proof that a certain loss is preferred to a general uncertainty. The "sweetener" in this case is an expanded European Financial Stability Facility, which is to be leveraged from €446 billion to €1 trillion. Such leverage would eventually require the participation of cash-rich outsiders such as China, but that is a crisis for another day.

Atlas Shrunk

If the strong want to lift up the weak,
As the Germans and French would the Greek,
It is best if such acts
Do not overly tax
The Teutonic or Gallic physique.

Plans to support the public finances of Europe's peripheral nations have been thrown into fresh doubt by the news that France's Aaa rating from Moody's is under pressure.  The rating agency's French analyst, Alexander Kockerbeck, noted that France has "a lot of additional risks we did not have in the past," pointing to "developments in the euro zone."  The €440 billion European Financial Stability Facility is designed to let the triple-A countries guarantee some of the debts of the shakier ones.  If France is downgraded, then the EFSF must either do without the €158 billion French participation, or accept a double-A rating.  Germany may be bracing for a heavier burden.

European Financial Stability Negotiations

Said Merkel, "On this I agree
With Monsieur Président Sarkozy:
There's a pretty good chance
Of a downgrade for France
And political fallout for me."

Against the backdrop of the failure of the French-Belgian bank Dexia, French President Nicholas Sarkozy met with German Chancellor Angela Merkel on Sunday to resolve their differences over the path to European financial stability. The two announced to the press that a deal would be struck by the end of the month, meaning that agreement is still a long way off. France would like its banks to have access to the European Financial Stability Facility for capital support, but Germany - the biggest contributor to the EFSF - would face domestic political unrest. The Germans, for their part, would like troubled banks to draw on private or national capital sources, but France might face a downgrade if it tried to shore up its banks on its own. A Franco-German agreement is key to resolving the Greco-Italo-Hispano debt crisis that grips Europe.

Euro Yes, Drachma No

There'll be many a Euro bank run done
If the euro's allowed to come un-done,
But Greece in the ranks
Will be best for the banks
In Frankfurt and Paris and Lon-don.

With all the Greek unrest, European can-kicking and German resistance, many ask: why keep Greece in the euro zone? After all, they're effectively bankrupt and everyone knows that they will default sooner or later. However, those who have thought the situation through say that, while an orderly Greek default within the euro will bring pain, a chaotic default in a "new drachma" would bring disaster, both for the Greeks and their European creditors. As a Bloomberg editorial put it:

"The possibilities range from runs on European banks to violent rioting in the streets of Athens -- or even civil war... a prepackaged, well-managed bankruptcy, not unlike the ones arranged by the Obama administration for General Motors Co. and Chrysler Group LLC in 2009, would be better than letting the chips fall where they may."

Greco-Franco-German Wrestling

EC President José Barroso
Says: "The scope of the Greek crisis grows so!
Will combined intervention
Of Germans and French in
This crisis suffice? I suppose so."

Like a pair of grappling Olympians, the leaders of Germany and France are trying to pin down the Greek credit crisis before it injures the Spaniards and Italians. Details of the new accord reached between German Chancellor Angela Merkel and French President Nicolas Sarkozy Wednesday night in Berlin have not yet been revealed, but are expected to include fresh emergency loans to Athens from euro zone governments and the IMF. European Commission president José Manuel Barroso warned all of his member states of the dire global economic consequences of failing to act decisively: "None of these Tea Party shenanigans," he admonished. #notreally

We Never Learn

Said an analyst: "Risk, from where I sit,
Is consistent, however you slice it,
And our colleagues in banking,
For profit or ranking,
Consistently still underprice it."

Investment manager and commentator Barry Ritholtz, frustrated by the events unfolding between Greece and its creditors, poses the thoughtful question: "Who the f--- would lend a dime to these people?" In a rant posted on his blog, Mr. Ritholtz asserts that lenders are to blame when borrowers default for reasons that were well-known when the deal was done. We agree, but bankers themselves know that competition and the search for yield will, time and again, lead them to underprice risk, or wish it away.

The Times Catch Up with Mr. Hugh

A Cassandra, alone and aloof,
Said: "The Euro is done - here's the proof:
Cold logic determines
The Greeks and the Germans
Can't cohabit under one roof."  

Thanks to Edward Hugh for his unwavering grip on reality.

Intra-European Wealth Transfer

Says Herr Pöhl, ex-Bundesbank president, 
"This bailout's akin to embezzlement. 
Greek tycoons and French banks 
Owe my countrymen thanks 
For this really regrettable precedent."

Why Does the Greek Crisis Matter?

Josef Ackermann deftly explained
Why Greece has the markets so strained:
Like a wellhead that leaks,
A default by the Greeks
Could probably not be contained. 

Diagnosing the Dow's Dizzy Drop

While coaxing the PIGS from the trough,
Some bankers developed a cough,
Which an I.T. snafu
Turned into swine flu,
And a feverish market sold off.

(Acronym alert: PIGS = Portugal, Italy/Ireland, GREECE and Spain)

Greek Debt Crisis, Explained

There are two indisputable facts
That toppled the Greeks on their backs:
Every third Greek today
Works for government pay,
And the rest are evading their tax.

Cautionary Comparison

Said Bernanke, "Our debt looks unkempt to me,
And thriftier we must attempt to be,
For a few sidelong peeks
At the Spaniards and Greeks
Show examples that don't seem exemplary."

A Soft Spot in his Heart

Said the IMF head, Dominique:
"While Athens' finances are bleak,
As a good European,
I regard the Aegean
As the cradle of l'Europe Antique."

The Real Blow-Up

An eruption, intense and gigantic,
Roiled markets across the Atlantic;
This vesuvian debt,
One mustn't forget,
Is Hellenic more so than Icelandic.

Urgent EU Consultation

Said van Rompuy to Merkel: "I task you
With assuring Athenians' rescue."
"It doesn't look rosy," 
Said she to Sarkozy,
"But are bailouts the answer? I ask you!"