Worries of a New Debt Contagion Rattle Wall Street

 |  Includes: BAC, BK, C, DB, EWG, HSBC, IGOV, JPM, STT, WFC
by: The Housing Time Bomb

Stocks sold off sharply yesterday as worries around the fiscal health of Greece and the rest of the PIIGS finally hit equities in the US.

I must admit that Monday's bounce surprised me after the sharp sell-off in Europe earlier in the day. I guess I shouldn't be shocked: The bulltards are really good at sticking their head in the sand and pretending everything is fine as they buy buy buy.

It usually takes a sledgehammer to the head like we saw in late 2008 in order to get the bulls to finally stop hitting the "buy" button. I thought Greece would be a sufficient blow to the skull on Monday, but the message didn't get through until yesterday.

Let's get real here for a second folks: The European sovereign debt crisis issue is a serious problem for everyone around the world and it is not going away anytime soon.

The US banks alone have $176 billion in exposure to the PIIGS:

NEW YORK, Feb 9 (Reuters) - U.S. banks have $176 billion in exposure to Greece, Ireland, Portugal and Spain, with risks concentrated among the 10 largest U.S. banks, Barclays Capital said on Tuesday.

The FFIEC data shows that 10 U.S. banks -- Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of New York (NYSE:BK), State Street (NYSE:STT), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and the U.S. branches of Deutsche Bank (NYSE:DB) and HSBC (HBC) -- hold 96 percent of the risk, Barclays said.

The banks have $86 billion in exposure to Ireland, $68 billion to Spain, $18 billion to Greece and $9 billion to Portugal, Barclays said.

My Take:

If the issue was just Greece it could easily be handled. The problem is Wall St. is asking "who is next?" versus saying its contained because the debt burden looks just as bad among the other PIIGS countires.

As a result, this is slowly developing into a game of dominos where the risk is if one of them tips over (via default like Greece) the rest go down with them.

As I said last week, the money is not there to save all of the PIIGS without massive money printing which I don't believe the ECB is willing to do.

The euro then becomes a giant question mark because countries may decide to take things into their own hands by flipping back to their old currencies.

Haven't We Seen this Game Before?

This debt crisis (although different) reminds me a lot of the subrime crisis which eventually almost took down the banking system here in the USA.

Like Greece, our meltdown started with a small area of the global financial system which we called subprime loans. The bankers quickly came out and said that subprime was "contained" just like Greece "supposedly" is right now.

Later on of course we learned that this was a bunch of hogwash when we realized that just about all of the MBS's of mortgage debt that were created during the housing bubble turned out to basically be worthless.

Of course, you would never know this if you saw it on any bank's balance sheet today. Most of this debt is still marked at full value thanks to our new "fraudulent" accounting standards.

I think we are about to see the same thing occur in Europe as this crisis no longer stays "contained" and begins to unwind.

Fiscally these two crises are very different. Fundamentally however, the problem remains the same:

The oligarchs of the world want to live the good life at the expense of the middle/lower class peasants. When a crisis hits, the elite want the peasants to pay for their greedy mistakes via higher taxes and other austerity measures.

The bankers/oligarchs pulled it off over here by creating the TARP and forcing the taxpayer to backstop all of their mistakes.

The same thing is being attempted in Europe as we speak. The ECB and IMF are ready to puke up $146 billion to Greece alone! This is absolutely disgusting in my view.

The retirement age in Greece is 55! What are they smoking over there?

The Bottom Line

It appears the looting will never stop no matter where you are in the world. The bankers in the USA told us that the economic system would blow if we didn't bail them out.

They thanked us by gambling our taxpayer money in the stock market casino where they took enormous risks and made billions in bonuses. The bankers didn't care if they lost because it wasn't their money they were spending: It was ours!

Once they got the game rigged via faulty accounting standards and front running the market via HFTs"high frequency trading", they paid us back our TARP money. Sigh.... The whole thing makes me want to vomit.

I expect to see a similar extortion attempt by the PIIGS and bankers in Europe in coming weeks. Remember, if the PIIGS go down so do the European bankers.

I am sure they will try and threaten the world by saying that the whole financial system will blow if they let someone fail or default.

It won't be so easy this time though because I think the world has wised up. For instance, there is vehement opposition in Germany to bailing out any of the PIIGS. Making things even more interesting is the fact that the German elections are held in May.

In the meantime, the German politicians vote on the Greek bailout on Friday. All 16 countries involved in the euro need to approve this bailout via their own forms of Congress. This includes Portugal and Spain which is a joke in and of itself since both countries are broke.

Germany however is the key, and the concern is the Germans are not sure that Greece has the political will to enforce the austerity rules that have been agreed upon by the two countries.

I guess it's kinda hard to tell an angry mob of Greeks that they can't retire until age 67 when they used to be able to walk at 55!

There are HUGE protests scheduled mid-week in Greece. If things get outta hand with torches and pitchforks, it might force Germany to second guess their agreement and make the politicians lean towards voting "no" on Friday.

Keep an eye on the developments across the pond. The bond vigilantes started pounding the PIIGS bonds once again yesterday. Spreads blew out after a brief 1 day relief rally following the Greek bailout announcement.

The bond market loves to call your bluff and force your hand after you make a play like the ECB did on Friday after announcing the Greek austerity bailout.

The bond traders know that the debt issues run much deeper than just Greece, and they want to know what the ECB is going to do to "save" the other PIIGS. What's scary is I don't think there is an answer to this question because the money isn't there to save all of them.

If they don't get an answer, I believe credit spreads will continue to blow out which means the risk of a sovereign default is very real.

If this default fuse gets lit, all hell could break loose in the markets.

: No new positions at the time of publishing.