The rest is noise: three policy makers signal Greece's destiny

[NEW YORK] As Greece hurtles toward another denouement, figuring out who to listen to can be a challenge.

One minute Finance Minister Yanis Varoufakis is moving Greek bond yields by saying a deal is imminent. The next, his claims are being shot down by Germany's Wolfgang Schaeuble.

The result has pushed securities this way and that while giving few clues as to how the crisis will eventually play out.

The trick, say economists from ING Diba in Frankfurt to Berenberg Bank in London, is to focus on the people who exercise true power over the euro region's bond and currency markets right now: Greek Prime Minister Alexis Tsipras, German Chancellor Angela Merkel and European Central Bank President Mario Draghi.

"You'll have to take your guidance from these three," ING Diba's chief economist, Carsten Brzeski, said in a telephone interview. "While Merkel is keeping a low profile with her comments, she plays a crucial role."

In charge of Europe's economic powerhouse for a decade, Ms Merkel has been around since the opening act of the Greek crisis and will be critical in deciding how it ends, juggling voter saturation at subsidising Greece with the desire to avoid a breakup of the euro.

Leading the opposite camp is Mr Tsipras, playing hardball to end the austerity, humiliation and suffering of the Greeks. In the middle, the Italian-born central banker is doing whatever it takes to preserve the euro.

While finance ministers, ECB officials and even rank-and- file lawmakers keep investors on their toes with their prognostications of where the talks between Greece and its creditors are heading, it's this trio making the weather.

Mr Tsipras's January election victory ushered in a new phase of upheaval for investors in Greek assets. The volatility on the country's 2017 bonds has been 45 per cent over the past 90 days. In the last three months of 2014 it was just 19 per cent.

Within the Greek power matrix, Finance Minister Yanis Varoufakis makes the most noise, but Mr Tsipras is the decider. When Mr Varoufakis declared in January that Greece was abandoning its rescue program, Mr Tsipras stopped the ensuing rout by calling for a "mutually beneficial" deal. Mr Varoufakis was sidelined last month after his clashes with European colleagues began to jeopardize the country's effort to access aid.

The Tsipras effect on the markets has been tangible since Dec 8, when then-Prime Minister Antonis Samaras called a key vote in parliament that went on to trigger a snap election. The Athens stock market tumbled 13 per cent the day after that decision, the most in 27 years. Greek stocks and bonds have both accumulated losses of 18 per cent in total since then.

Since Mr Tsipras's emergence, Mr Draghi has encouraged investors to tune out more radical voices while maintaining the pressure on Greece by rationing the emergency liquidity sustaining the country's banking system. While the goal of his quantitative- easing program was to boost inflation across the euro area, it has also cushioned all non-Greek bond markets against the turmoil in Greece.

Ms Merkel has so far stayed relatively quiet during this phase of the Greek crisis. But in the past she has spooked bond markets and shoved aside prime ministers in her crusade to make the currency union durable.

Her decision at a 2010 meeting in Deauville, France, that private creditors would suffer losses in future sovereign bailouts triggered a two-year selloff that toppled governments and banks across southern Europe. Within weeks of her decision, Ireland had asked the euro area for a rescue and Portugal, Spain and Cyprus followed.

While financial turmoil brought the currency union to the brink, it increased Ms Merkel's leverage over her fellow leaders.

With Italian bond yields spiraling in 2011, Ms Merkel forced Prime Minister Silvio Berlusconi to accept International Monetary Fund monitoring of his austerity program. A week later Mr Berlusconi resigned.

When then-Greek Prime Minister George Papandreou threatened to put Europe's demands for austerity to a referendum, he was shot down by Ms Merkel's insistence it could only be a vote on euro membership.

The rout that began in Deauville was halted in July 2012 by Draghi's pledge to do "whatever it takes" to keep the euro region together.

In the latest phase of the crisis, Ms Merkel and Mr Draghi's commitment to the currency union has kept a lid on investors' concerns that Greece could default on its obligations placing its euro membership in jeopardy once again.

As Greek officials wrangle with their creditors over the terms for tapping more financial aid, Ms Merkel has intervened intermittently to tame sporadic selloffs by reminding investors that she aims to reach a compromise. Mr Draghi last weighed in on April 15, at the monthly ECB press conference saying he wouldn't even contemplate a default by Greece.

"Based on the Greek government leaders' statements, this option is not contemplated by themselves as well, so I'm not ready to discuss any possible situation like that," he said.

With officials targeting a deal by the end of this month as European leaders gather in Riga, Latvia, the chancellor is considering a keynote speech to explain its benefits to German voters and lawmakers. Ms Merkel's seal of approval could make the agreement significant enough to usher in a new weather system for investors.

"It's significant that Merkel says something now," said Guntram Wolff, director of the Brussels-based Bruegel research group. "There's been a lot of chatter around but now we start to see the final decision-makers move into action." BLOOMBERG


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