The EU stumbled in Slovakia last week as they questioned why an EU member who plays within the rules and has the lowest average salaries in the eurozone should bail out a country with three times their pensions and a history of noncompliance.
In the wake of UBS’s $2 billion dollar forex loss caused by the pegging of the Swiss Franc to the Euro trading desks around the world are running simulations regarding a potential Greek default.
Books are becoming more and more vanilla as we approach the tipping point.
The EU now wants to reopen the July agreement which called for bondholders to take a 21% haircut in hopes of raising the haircut to 50% or more.
Two questions immediately spring to mind.
1. If you thought there was even a remote possibility of a 50% forced write down of Greek debt, why would you invest in European banks before the write down?
2. If the 50% forced write down happens will anyone buy Greek debt in the future?
Looking at the 1 year Greek bond yield on Bloomberg of almost 169% I would say the answer is no to both questions.
The market is clearly pricing a default into Greek debt and when the default comes it will likely cause more damage than people expect.
The banking system in Greece is already reeling with the failure of Proton Bank last week when the board discovered 51 million euros in loans that did not have the proper approvals.
One thing is for certain, if Greece is given their loan through a controlled default it will create significant moral hazard within the system. All of Europe becomes a shorting opportunity as countries will now take the Slovak route of why should I bailout the serial defaulters?
As Germany and France look to make changes to the voting mechanism to push through changes to the EU and EFSF without member state approvals look for anger to rise from the smaller states possibly destroying the EU itself.
There is no chance that the upcoming summit will provide a comprehensive agreement that solves every problem. That can only come when Greece embraces austerity. Until then Europe will be content to put a band aid on a problem.
Once this weekend passes everything in Europe becomes a short target and funds are already lining up at the door.
The only safe place to be will be gold (GLD), (DGP) and silver(SLV), (AGQ). The ensuing rally will not happen from the US but Europe as citizens scramble for safety in these increasingly uncertain times.