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Rescue-on/Rescue-off, Round Two

The mistake by Greece was that it's not big enough. In this sense, Spain is not Greece. With Too Big To Fail status, Spain can afford to bluff, to dominate and prevail at the negotiation table. Unless and until the conditions for rescue are watered down enough, Spain has no incentive to apply or, even after accepting money with pride and grace, to actually comply with conditions.

This is due to the philosophically flawed design of OMT, as is the case for all euro rescue plans so far -- or one might say even the euro itself -- not the moral quality of any individual or group.

So the reality is the supposed conditions for OMT have no teeth. They are there only to stop German Bundesbank President Jens Weidmann from resigning, at least for now, causing a huge embarrassment to ECB and serious damage to its credibility and effectiveness, as reported by Reuters in a fascinating account of events leading to the OMT announcement.

The ECB is destined to capitulate every time. The reluctance may be genuine on the individual level, but borders on scam in the sense that the bank has no choice from day one. The German people will be reminded of various previous capitulations on Greece and Italy, only this time on a much bigger scale.

How long will Germans endure such Outright Monetary Thievery I do not know. It's just a step down the road leading to the inevitable "Gerxit."

Market Cycles

To summarize, as long as the ECB holds the line on conditions, the swing will become wilder and quicker through each rescue-on/rescue-off iteration as the stakes get higher and the likelihood of complete capitulation (by either side) increases.

When the ECB finally gives in, though probably with some conditionality if only as a nod to Germans but otherwise destined to be violated without any consequences, the swing will take on a new direction: German political upheaval will set in, maybe even just in time for the election next year, and the word "Gerxit" will go mainstream.

Then it's game over for Experimento Euro.

For now, the rescue-off mode will last until Spanish 10-year bond yields make another run at 7% and Prime Minister Rajoy subtly hints at maybe considering rescue, if ECB begs him hard enough.

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