Folks, if you’re thinking about anything besides what’s going on in Europe these days, you’re missing the picture. I’ve said before that I don’t think the EU will break apart, but I do believe that we’ve gotten to a point where we need the other shoe to drop. And that shoe is a Greek bankruptcy.
Let’s face it: It’s only a matter of time before Greece defaults. You know it, I know it and, most importantly, the European central bankers and heads of European institutions know it. That’s the big difference between this banking crisis and what happened with our banks back in 2008. The CEOs of Lehman Brothers and Bear Stearns had no idea what was on their books, but everyone in the world knows exactly what European institutions have on their balance sheets. For proof, just look at the way their stocks have been decimated over the last few months—many of them have been cut in half, and others, like Commerzbank, have fallen off even more.
I mentioned on Monday how a Greek default would be similar to a state or municipality defaulting here in the States. Similar is not same, and as I pointed out on CNBC Asia last night, the difference is politics. If, say, California or New York City were to default, it would not have the same political implications as a sovereign nation inside the EU declaring bankruptcy. That’s why this is going to take time—because of the politics, not the economics, involved in this EU experiment.
As Joe Cusick of OptionsXpress said on the show yesterday, Greece isn’t too big to fail, it has already failed. The focus now should be on what happens with Italy’s substantially larger economy. If these European banks can take their write downs and Germany and France can make sure Italy stays solvent, I think the likely result is a more stabilized EU. And a more stable Europe is what we need for the euro and U.S. stocks, which have been moving together on a percentage basis, to finally decouple. That decoupling is the leak, and that could signal the beginning of a rally in equities that carries us through the end of the year.