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Athens Today. London Tomorrow? Washington Next Week?

Posted by Larry Doyle on May 5, 2010 8:20 AM |

With social unrest increasing in Greece, anxieties skyrocketing across the EU, and the Euro making new 12 month lows, the question begs as to whether this crisis within the EU can be contained. Is the EU, with the support of the IMF, willing to collectively underwrite the fiscal disaster currently focused within Greece? The German citizenry is showing very little appetite to subsidize this Greek tragedy.

While the EU’s political fortitude is a critical question, ultimately the reality of the mountainous debt levels must be faced. Global government stimulus has been able to mask, if not outright disguise, these debts for a period, but the debts themselves are not going away. How will the EU address this debt?

1. Devalue. That’s a given. It’s only a question of how and when.
2. Restructure. Look for more on this.
3. Default. Do not discount this reality.

All three of these scenarios do not portend a bright future for the Euro or the EU itself. Let’s revisit a commentary I first put forth in March 2009, “Why is George Soros Short the Euro?”:

Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.”

Jensen initially provides a backdrop of the collective guilt across all market participants in this global economic meltdown. The U.K. government is targeted by Jensen for their total lack of fiscal discipline in the process. He further adds that the outlandish banking compensation was a direct correlation of the leverage employed. Jensen focuses on the preponderance of supposed AAA rated CLOs (Collateralized Loan Obligations) backed by corporate loans and credit cards. The leverage employed by the European banks dwarfed the leverage employed by U.S. banks.

To this point Jensen’s analysis is enlightening but not earth shattering. He then enters into the rate of expected defaults on the European banks’ balance sheets, the exposures to eastern Europe, and the specifics of mortgage borrowing by eastern European citizens from European banks. I started to get a little queasy.

Embedded in this commentary is a 2009 chart, the Country Vulnerability Scorecard, which highlights the debt burdens of global governments. The five western nations deemed most vulnerable when this chart was drafted were Iceland, Greece, Spain, United Kingdom, and the United States. The fiscal disasters within selected EU countries have elevated over the last year, but the dark clouds from massive debts on our economic landscape are only growing larger.

Athens today. London tomorrow? Washington next week?

For more on this topic, read a WSJ commentary, A Tale of Three Cities.


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  • Aaron Kramer

    Global Default is upon us! There is just too much debt in the world, plain and simple.

  • divvytrader

    California and New York are little different from Greece …. politicans are terrified of state unions but hopelessly bankrupt .

  • Nicolas E. Benito

    Political aspects were disregarded. Not to mention simple economical aspects as to have a centralized fiscal surveyance and regulating system for the EU.
    Now political interdependence between EU members should be deepened: confederating Europe might be the answer to stop the systemic crisis that is menacing the whole World !

    • LD

      I do not see this happening. The cultural differences run so deep throughout the EU that I believe those differences will inhibit the stronger countries from going all in to save the weaker.

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