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Will Merkel blink? Talk of Greece quitting the euro zone is growing louder by the day.
Everyone from the European Commission to the European Central Bank is building contingency plans in the wake of elections two weeks ago that left Athens with a caretaker leader until a new vote is held in mid-June. This comes amid a backdrop of Greeks having pulled €1.3-billion out of their banks over the past week.
On the one side is the Syriza group, which placed a surprising second in the election and wants to tear up the bailout agreements that imposed harsh austerity measures on Greece. On the other is New Democracy, which would no doubt want to change rescue provisions but would also likely end up working its way through.
"With new Greek elections on 17 June, a protest against established parties puts the radical left-wing Syriza party in pole position to form a coalition government," said Kit Juckes, the chief of foreign exchange at Société Générale.
"They would oppose the terms of Greece's bailout and put the country's membership of the euro zone at grave risk. A movement down this path would be drawn out over months, not weeks - but investors, and anyone who uses and trades in the euro, simply cannot ignore the risk of a 'Grexit'."
Grexit is the new term among observers for Greece's potential exit from the embattled 17-member monetary union.
There's a twist in Greek elections in that the first-place finisher gets a 50-seat bonus, and the outcome is difficult to call. Most polls of late showed Syriza in the lead, though one had its rival moving ahead.
Elsa Lignos and Adam Cole of RBC in Europe took an in-depth look at the scenarios this week, warning there's a lot at stake.
"European leaders are framing it as a referendum on euro membership, warning that if Greece wants to stay in the club it has to stick to the rules," they said.
I can't reproduce their lengthy report, but I can try to condense their four scenarios:
1. Syriza places first: "Bearing in mind Greece does not want to leave the euro and there is no official mechanism to kick it out, an exit is not inevitable but under these circumstances, it becomes highly likely ... Contingency plans for Greek exit then kick into place. There will be an EU/ECB policy response to build a firewall around the remaining euro zone members, though it is an open question how quickly that can be executed and whether it would be enough."
2. New Democracy comes first: "A New Democracy coalition is not a magic bullet that solves Greece's problems though it should see an immediate drop in estimated probabilities for a euro exit. The new government will still want to renegotiate parts of the second bailout; though it is more likely to reach a compromise with creditors."
3. No coaltiion: "The election may still throw up the scenario of no possible coalition (again), leaving Greece at greater risk of bank runs and breakdown in public order. It could result from a strong rise in support for the extremes (the Communist Party on the left, Golden Dawn on the right) ... The likelihood of this outcome is low as polls point to falling rather than rising support for the extremes since the last election. But if it occurs it puts European policy makers in a harder position as there is no democratically elected counterpart for them to negotiate with and in a worst-case scenario, no one to manage an exit."
4. A bank run before the election: "The largest pre-election risk is a bank run that forces the ECB into a difficult political choice ... Does the ECB offer unlimited support to the banking system, knowing that it is increasing its potential losses in a few weeks' time or does it try to limit its exposure? If it pulls liquidity from Greek banks, the banking system collapses. It is hard to see how a euro exit can be avoided if the Bank of Greece is powerless to support domestic banks. If the ECB maintains support, the cost to the central bank of an eventual Greek exit may skyrocket. Contagion risk is also high unless the central bank intervenes. On balance we think the ECB is more likely to maintain support ... but it ups the stakes and may provoke a backlash in the core."
Benjamin Tal of CIBC World Markets believes Zyriza is, in many ways, trying to call the bluff of German Chancellor Angela Merkel, the driving force behind austerity and fiscal prudence in the euro zone.
"Their thesis is that the hawkish chancellor and the euro zone as a whole are facing an asymmetrical risk," he said. "A Greek exit is a strategy with a degree of risk. No one has tried breaking up a monetary union before. There is absolutely no way to know in advance whether the crisis spreading to other countries can be controlled."
Troubles would spread rapidly to other weaker nations, such as Spain and Italy, putting Ms. Merkel and other euro zone leaders in a difficult position.
"Simple math might convince Germany to close its eyes and buy Greece, Italy and Spain more time - at least until it gets all its ducks in a row for a more orderly Greek exit," said Mr. Tal. "For now, in this game of chicken, Merkel might blink first."
- Europe thinks the unthinkable on Greece
- Nervous Greeks pull money from banks
- German frustration builds with no end in sight for Greek woes
- The euro divide: Some stout, others border on 'depression'
- Greek turmoil sinks markets: 'In the grip of another crisis'
Facebook's muted debut At the end of the day, it came down to 23 cents.
Shares of Facebook Inc. popped as they began trading on Nasdaq Friday, climbing by more than 10 per cent. But they closed at just $38.23 (U.S.), just a tick from the initial public offering price of $38.
Hundreds of millions of shares traded hands, The Globe and Mail's Omar El Akkad reported, though the price had to be supported by underwriters. The company is now valued at more than $100-billion.
CP fight ends with resignation The months-long battle for control of Canadian Pacific Railway Ltd. ended this week with capitulation.
Bill Ackman, the activist investor from Pershing Square Capital Management, was set to go into a proxy vote with major players on his side, demanding that chief executive officer Fred Green be replaced, and his dissident slate of directors be elected.
Rather than face an embarrassing defeat, several board members said they would not stand for re-election, and Mr. Green resigned.
Shareholders of the railway have already benefited, their stock having climbed since Mr. Ackman became the biggest shareholder.
- CP's last supper: Why railway brass decided it was time to surrender
- Boyd Erman's Streetwise: CP fight puts other boards on notice
Required reading this week Gold is an investing theme that has thrived through years of market shifts. But now, David Parkinson writes, one of the long-accepted rationales for turning to the precious substance – as a haven from risk – has been turned on its ear.
Canadians are spending far more on goods in the U.S. than federal data suggest, raising the stakes for domestic retailers trying to find ways to draw customers back into their stores. Tavia Grant and Marina Strauss look at the issue.
The Canadian government has placed 905,000 hectares of the northern offshore up for bids, clearing the way for energy companies to snap up exploration rights for an area half the size of Lake Ontario, Nathan VanderKlippe reports.
Canadian factories are powering up, gaining from the slow but steady pickup in the United States and changing their ways to take advantage of the resource boom, Jeremy Torobin writes.
As beer makers see their market share decline, they're ramping up their introduction of flavoured beers to entice wine and spirits drinkers, Susan Krashinsky reports.
What to watch for next week We'll see how consumers are keeping up when Statistics Canada reports Wednesday on how retailers fared in March.
Economists expect to see that retail sales bounced back to the tune of 0.3 per cent after a dip in February. And if you strip out autos, they're betting on a bounce of 0.5 per cent to 0.6 per cent.
"March's warm temperatures were probably a boon to retailers, namely sellers of building materials, hobby items, and discretionary goods," said Emanuella Enenajor of CIBC World Markets.
"Although gasoline prices fell on a seasonally adjusted basis, the dent to receipts may have been limited by the robust weather that supported incentives to gas-up and head outdoors."
For investors, Canada's major banks begin another quarterly earnings season, with results next week from Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank.