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Brussels, we have a problem. A growing one.

According to the Daily Telegraph, Portugal, apparently taking collateral damage in credit markets from Ireland's reluctance to accept a bailout and apparently using the latest dust-up for cover, is now suggesting it's "on the brink of seeking help from Brussels after Ireland confirmed it had begun preliminary talks over its debt problems."

In credit default swap markets, Ireland and Portugal are already priced as the highest default risks in the European Union after Greece.

Expect market appraisal of that risk to rise significantly in trading today, and for the euro to take more hits on this.

If Western Europe sinks into a new financial crisis and a new downturn, the U.S. will be dragged into a new recession - no ifs, ands or buts. Germany, the UK, France and the Netherlands occupy four spots among our top 11 export markets.

For all the talk of a booming Asia and Latin America, Europe remains one of our biggest export markets. It was the source of 20% of our export receipts over the past year. Half of what little economic growth the U.S. has had over the past year has come from exports (Table 2, Contributions).

With the Federal Reserve under greater scrutiny by newly empowered Republicans, Europe is on its own.

I maintain the view that for the very reason Europe is confronting reality -- the necessity of austerity, reforming its bloated welfare state and bolstering its competitiveness -- earlier than we are, and doing so without resorting to money printing on the scale we are, the region is emerging as a better medium- and long-term investment bet than the U.S.

But it will be a bumpy ride.

Disclosure: None

Source: Euro Crisis II and III: First Greece, Maybe Ireland, Now Portugal