Who Will Blink First in Greek Crisis?

06/10/2011 4:31 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The German government and European Central Bank are playing “huhn” (chicken, to us Anglophones) with the euro and the Greek debt crisis.

With the deadline for a new “solution” to the Greek debt crisis closing fast—June 24 is the date that keeps coming up—both sides have stepped up the rhetoric.

German finance minister Wolfgang Schaeuble told German legislators today, June 10: “Participation of private creditors in cases of insolvency is indispensable.”

Meanwhile, European Central Bank president Jean-Claude Trichet not only repeated his statement that the ECB opposes any effort to require holders of Greek debt to participate in any mandatory extension of maturities on Greek bonds, but has turned that opposition into a warning.

Not only does the central bank have no intention of participating in any extension program, but also in its view, Trichet said, any mandatory extension would trigger a “default” ruling from the rating agencies. That would produce a massive sell-off in Greek debt, and make it impossible for Greece to fund maturing debt.

And, Trichet added, the ECB would refuse, under those circumstances, to accept Greek government debt as collateral for loans to Greek banks. That, of course, would set off a crisis in the Greek banking sector, as Greek banks ran out of cash.

Estimates say the ECB has purchased about $60 billion in Greek government bonds to provide short-term financing to the country's government. It has also lent close to $300 billion to banks in Portugal, Ireland, and Greece on collateral that includes a large helping of government debt from those three nations.

The euro is down about 1.1% today against the dollar, as of 3 p.m. New York time.

Why the escalation of rhetoric? And why now?

A good part of the reason is the bet by Germany’s leaders that the ECB will chicken out first, as it did just about a year ago—and a belief on the part of the central bank that it can’t compromise this time without doing real damage to its long-term credibility.

In June 2010, Trichet was absolute in his conviction that the bank would never buy the bonds of European governments in the open market, as part of a move to support the debt of Greece, Portugal or Ireland.

"I would say we did not discuss this option," he told a news conference after an ECB Governing Council meeting in Lisbon.

Four days later, the ECB started to buy government debt in the open market, and has continued to do so as the crisis continued.

I think you can understand why the German government thinks it can get the bank to blink again.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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