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Monday, May 9, 2011

Market Thought... Greece

I have heard just about enough of Greece.  We all know Greece's debt situation is a mess, the market is already pricing in a 60-70% restructuring. But here we are again with Denis Gartman on Fast Money touting that Europe will be broken up, with the strong countries maintaining the Euro and weaker countries getting their own currencies again.  He was touting this crap, and I say the word crap very strongly, last year too.

Here is why it is crap. While there is a clear divide between economic strength of EU countries, their banks are not so evenly divided. If Europe decides to kick Spain, Ireland (even though they are actually making really good progress) Greece and Portugal out and they adopt their own currencies, the hit to the European banks will be so severe that all banks will need a bailout.  Because instead of a 60-70% restructuring, the market will hit the new currencies so severely that the 'PiGS' bonds will see a potential 200-400% market forced depreciation.  With the new Basel 3 requirements, the EU banks will not be able to handle this type of credit depreciation. It puts the entire system at risk, again.  Instead of bailing out the PIGS, the strong EU economies will have to bailout all the EU banks. (Pick your poison.)

The markets are not going to like any type of restructuring because of how inter-twined the banks are in this, but how the restructuring is handled will drive the level of negativity. If the market gets the restructuring that it is anticipating, and spread out over time, the negativity will be minimal and the SP500 may not breach 1300. But if the PIGS are forced out of the Euro, well, expect the SP500 to go toward 1190 (the 320SMA).

A unified country is not a fair proposition. California, New York, Delaware and other economically strong states subsidize New Mexico, Kansas and other economically weaker states. Its not fair, but it is the nature of the system.  This is no different in Europe.  The subsidy is the burden of the economically strong state. If the powers that be didn't like it, they should have never unified.

The thing is, the powers that be are not stupid, and they know all this already. And the PIGS countries know they can not leave the EU either. If they leave on their own, they will fuck over all the banks/funds they need to purchase their new debt. When I get fucked over I do not help the person who just fucked me. Basically, there will be no one to purchase their new debt, and they will not be able to survive on their own.

Common sense tells us that their will be sensible restructuring handled over time. It will be a burden, but not one that will derail the global economic recovery.

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