Default, It's Greek to Me

Back at the beginning of 2009 I did some predictions. The one that led to the most offense to some commenters was that the EU would in time lose members, though I did not expect it to happen that year, 2009. I personally am surprised they have held their act together this long. Their model is broken as such diverse countries and economies need diverse currency and ability to react to economic downturns, which is currently being highlighted for the EU.

Though my prediction was in 2009, things are this year, at the latest next year, coming to a head. It is somewhat of the immovable object versus the irresistable force story. The force is the EU and the current object is Greece and its citizens. You see the citizens of Greece seem to be a bit unwilling to take the dive for all of Europe - surprise, surprise! Yes, the austerity that is being required of Greece for it to further kick the can down the road is not popular with the citizens of Greece, who are violently protesting. I am with the citizens as even with kicking the can it is virtually inevitable there will be a default eventually, so let's get it over with now and move on. Oddly, on this point, I am finally in agreement with Alan Greenspan.

http://www.bloomberg.com/news/2011-06-16/default-by-greece-almost-certain-greenspan.html

Now I read an article today that said this would not have any substantial impact directly on U.S. banks, but I also read an article earlier this week that noted U.S. banks have over $40 billion in exposure to Greece on indirect CDS positions for European banks. Go figure.

Some say this will be equivalent to the Lehman Brothers collapse and the connected financial collapse. I tend to think not. Yes, it will lead to a double dip and very well could lead to limited defaults by the likes of Italy, Spain, Portugal and Ireland, but I think most investors are already assuming this is likely. Greece presently is viewed by those who issue CDSs on its debt as having a 78% chance of default, so that is already baked in the cake. Do not get me wrong, default will be a major event and undoubtedly will lead to a double dip rescesssion, but I think it needs to happen, so do it and get it over with.

Here is the kicker. Banks around the world that we, the taxpayers, just saved a couple of years ago, are still making stupid investments in derivatives. They have not learned thanks to the willingness of the government to step in and save them. Can you say moral hazard? Say it with me again loudly - MORAL HAZARD!!!

The CEOs there want big bonuses and they will not get them being conservative. So they continue to have an investment bank side and they continue to take stupid chances with our money. I, for one, want the governments of the world to say screw you and the ship you came in on. Let the banks go belly up. Better for the government to directly do lending for a while than for spoiled brat banks to take advantage of our graces. Let them fail. Just like a default from Greece, we will survive after a period of severe pain.

So here is what I see happening. I have written about it multiple times before but it now seems to be coming to a head. Greece will not, at some point, be able to pass necessary austerity measures or make needed payments and it will default. The ratings, and cost of borrowing, will escalate for the rest of the PIIGS immediately and this will lead to some restructuring on their part as well. The citizens in these countries understand they are being asked to take the pain for banks in Germany, France and the US and they are to the point where they will say no, so banks in Germany, France and the US will once again look to the government to save them. When they do, what will we do this time? You know where I stand.

Disclosures: None