“It is the irrevocable decision of our government to honour the mandate of the Greek people and negotiate an end to the European Union’s austerity.” – Greek Prime Minister Alexis Tsipras speaking to lawmakers in Athens

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This morning we awaken to a bout of selling in risk assets on news that the Greek government has continued to take a hard line in their negotiations with the EU. In an emotional and defiant speech, Greek Prime Minister Alexis Tsipras refused to cede an inch.

“What we will not negotiate is the history and the dignity of our people,” said Tsipras.

I have been surprised at how cavalier the market has been regarding the possibility of the Greek situation devolving. Too many strategists still think that it will be solved at the last minute, like it always has in the past. Although that is always a possibility, at the very least that solution will only come at the last possible moment (which gives the market plenty of time to freak out), or more ominously, it will not come at all.

The enormity of the chasm between Greece and her creditors can best be summed up by the recent meeting between German Finance Minister Schaeuble and his Greek counterpart Varoufakis.

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In trying to describe the meeting, the austere German said, “my spokesman has advised me to say, ‘we agree to disagree.’”  In all my years of watching two faced politicians mouth useless words of platitude to describe tense meetings, I cannot recall one where the frustration came out so clearly. Varoufakis retorted with a “we didn’t even agree to disagree.” These two sides are miles apart.

Over the week-end Varoufakis doubled down on his aggressive tone, trying to splinter the EU away from the Germans:

“Officials of an important Italian institution approached me and told me that they are in solidarity with our country, but they cannot tell the truth as Italy is threatened by bankruptcy and they fear from the German consequences.”

These are not the kind of words you hear from someone about to roll over and make a deal.

They know that the European Union is fragile, but more importantly, the status quo is not a long term solution.

“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.
The euro zone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.
“I would warn anyone who is considering strategically amputating Greece from Europe because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”

The Greeks have very little to lose and they are going all in.

Have a look at the headlines from Tsipras’ speech:

*TSIPRAS SAYS GOVT WANTS GREEK PEOPLE TO REGAIN SOVEREIGNTY
TSIPRAS SAYS GREECE “WON’T TAKE ORDERS VIA EMAILS” ANY MORE
TSIPRAS SAYS AUSTERITY IS NOT AN EU RULE
Tsipras “Winning back our sovereignty, restoring equal role in Europe, tackling humanitarian crisis are among our key targets”
Tsipras “I am fully aware of difficulties and responsibilities”
TSIPRAS SAYS REBUILDING GREECE WILL TAKE YEARS
“Things are difficult in Europe, but they are changing. Greece will play a leading role”
“The problem is not just Greek – it is European – and the solution will be European”
TSIPRAS SAYS CRISIS NOT JUST GREEK, IS EUROPEAN CRISIS
TSIPRAS SAYS WON’T NEGOTIATE ON GREEK NATIONAL SOVEREIGNTY
TSIPRAS: GREEK PEOPLE GAVE MANDATE TO END AUSTERITY, BAILOUT

The Greeks will not back down, which leaves the Germans. Do they cede at the last moment? I don’t know. My guess is that the Germans endured an amazing amount of economic pain integrating East Germany with the West, so they expect the rest of Europe to be willing to do the same. I don’t think they blink.

How much are the German politicians willing to concede to keep their beloved European Union intact? The Greek government’s mandate is quite clear – they were elected with an explicit mission. The German politicians’ mandate is not so clear. There is probably more wiggle room on the German side, but the chance of the politicians stepping back and claiming they don’t have the mandate to give away the German people’s money is high. Without a brave willingness to change, there is a good chance that the status quo prevails and Greece slips out of the union.

I think the markets were assigning a 10% chance of this happening, with this week-end’s developments moving that up to 20%. I believe the chances are probably greater than 50/50.

I said it before, and I will repeat it again. Don’t expect this to get better before it gets worse.


The most important chart in the whole world

Last year I kept harping on the fact that the sharp rise of the Euro versus the Japanese Yen was too much for the European economy to handle.

http://themacrotourist.com/images/Azure/EURJPYFeb0915.png

The first wave of Abeconomics sent the EURJPY from 95 to 145 in the space of about a year. That move of more than a 50% devaluation was difficult for the Europeans to handle. But then the second wave of Japanese QE in October was simply too much for the Europeans. The move up to 150 EURJPY was the Europeans’ “puke point.” At that point they had no choice but to respond with their own QE program.

The exact same thing is happening right now, and just like the Europeans, it is only a matter of time before this nation also “pukes.”

Since the 2008 credit crisis, the Chinese Renminbi has quietly been appreciating against the US dollar.

http://themacrotourist.com/images/Azure/USDCNYFeb0915.png

The move down from 6.90 to 6.25 was largely a function of the Chinese government allowing their currency to appreciate to assuage US concerns about the unfair currency pegging by the Chinese. However, the Japanese dramatic easing has changed the ball game.

The CNY has been steady against the US dollar, but the problem is that the US dollar has been rising against virtually every currency in the entire world. So the Chinese Renminbi has been the second strongest currency out there.

Have a look at the chart of the CNY versus the Japanese Yen.

http://themacrotourist.com/images/Azure/CNYJPYFeb0915.png

The Japanese Yen has depreciated by over 60% versus CNY over the past couple of years. And now the Euro has joined the party too.

http://themacrotourist.com/images/Azure/CNYEURFeb0915.png

The Chinese economy suddenly finds itself with a soft peg to a strong currency.

I contend that the American economy is going to have trouble dealing with this currency strength, but the Chinese economy is going to get absolutely annihilated by this move.

There is no way this can last for much longer. It is only a matter of time before the Chinese respond in some way. The game of competitive currency devaluations is about to take another step up in intensity.