The Morning Paper

24/05/12 -- Hurrah! The sun is shining & I've finally got my new mobile phone up & running after two days of pratting around. The dog is asleep on the carpet in a little patch of sun that is streaming in through the window, all is well with the world.

Well, apart from Greece that is. This particular millstone has been hanging around the neck of Europe since late in 2009 when the then PM, George Papandreou, was forced to announce that previous governments had lied about the size of the nation’s deficits.

European Council President Herman Van Rompuy said last night: "We want Greece to remain in the euro area while respecting its commitments." It clearly isn't going to do the latter from where I am standing, so where does that leave us on the former?

Caught between a rock and a hard place it would seem. Continue to throw more money after bad, or risk seeing the rest of Europe rapidly dragged into the mire. The consequences however of doing the former also potentially means acting likewise for Spain, Ireland, Portugal & Italy and the only way to do that is to turn the printing presses on 24/7.

Either route spells disaster for the euro.

So along we dither, as we have done for the last 2 1/2 years now. Something has to give, and Greece might finally force the issue soon after the June 17 elections now only a little more than three weeks away.

The repercussions of a Greek exit would have a major knock-on effect around the globe, not least in China who relies heavily on Europe as a consumer home for it's exports. So, amidst concerns about Chinese demand for soybeans and corn, with growth there already faltering, combined with a likely strong increase in value of the dollar (and question marks over grain & oilseed demand from Europe) and throw in the combined might of a mass exodus of fund money and the results of a Greek divorce look pretty clear for the grain market.

So what happens if Greece doesn't get expelled from school (or run away to join the circus) despite breaking all the rules? To stay they will undoubtedly want/need a further restructuring of their debt and/or more handouts and write downs. They will also have set a dangerous precedent for similar concessions to be shown to the next country up to the bowl saying "please Sir, can I have some more?"

That also would appear to signal further and significant euro depreciation, possibly less violently so than in scenario #1, but probably over a more protracted period. The ensuing prolonged European recession also looks bad for consumer demand in the EU and thus Chinese growth.

It's looking like a lose, lose situation. The question is will it be a sudden shorter-term lose, or a slower longer-term one? We might know the answer a month from now.