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Saudi Arabia, Kuwait and UAE see a slippery slope.  The current Egyptian government is an important bulwark against a threat that could jeopardize the political stability of their regimes. As ironic as it may seem, Greece's official creditors are less enlightened.  Even at this late date, they pretend that Greece has to decide whether it wants to remain in the monetary union or not.    To remain in the money union, they insist Greece needs to respect current agreements, even though they have clearly failed. 

The IMF itself has admitted it under-estimated the fiscal multiplier and over-estimated Greek growth.  It resists a mid-course correction.  The ECB and Germany seem particular sensitive to its slippery slope: whatever concessions are made to Greece will likely be demand by others.  Both Portugal and Spain hold elections later this year.   Spain's Podemos is polling strongly and share Syriza's predilections, even though Spain is among the fastest growing in the euro area.

Below the surface, there is a sense in official circles that Greece can leave and not pose systemic risk to EMU.  This a grave risk.  Officials have repeatedly been surprised by the market's reaction.  Remember Lehman?  The Swiss abandonment of its franc cap?

A Greek exit would demonstrate once and for all that EMU is reversible.  If Greece leaves and has a deep recession, high inflation and an intense banking crisis, as would be expected, it would be a severe cost to its creditors.  If it finds that its only friends are adversaries of Europe, like Russia, which has already offered assistance, would EMU members really be better off?  Negotiating with Greece, devising a new and sustainable course will ultimately be cheaper than sticking to the old course has failed.

Marc Chandler
Global head of currency strategy at BBH
Marc to Market

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