This is an update of my January 22 Seeking Alpha article warning investors that the euro bailout and Greek restructuring would fail, that Greece will default, and that some interesting investment opportunities will result.
As reported on January 22, it initially looked as though Greece might hold off on an actual default announcement until late March after the next scheduled payment date of its maturing sovereign debt and, perhaps, not even until after the 2012 German and French elections.
A number of events and realizations appear to be moving the schedule forward such that the official default announcement could come at any time.
The first was the realization that Europe's too-big-to-fail banks were in such trouble that merely funding them indirectly via paying off their holdings of the sovereign debt of Greece and other potential defaulters (Portugal, Ireland) as the debt matured would not be sufficient.
The second was the realization that the entrenched Greek bureaucracy had no intention of proceeding in good faith to carry out the reforms needed to enable the Greek economy to be sufficiently competitive to remain on the euro. In essence, the Greek bureaucrats made a mockery of the "reforms" that allegedly were used to justify funding Greece so it could stay on the euro and continue to pay off the too-big-to-fail banks as its sovereign debt came due.
The Greek bureaucrats and public resisted the reforms because they were making their economy and its fiscal condition even worse; and because they knew the "restructuring" of their economy was only a charade to justify helping the large European banks; and because they knew that the Greek economy had reached a state wherein only a devaluation of its currency could bring Greece's costs into line with those in the eurozone.
Why the country's leadership and parliament went along with the charade to help a handful of too-big-to-fail banks despite widespread public opposition probably speaks more to corruption and the lack of democracy than anything else.
The third was the realization that the too-big-to-fail banks holding the debt had never believed in the "Greek solution" in the first place - and had been busily unloading their Greek and other shaky sovereign debt on gullible hedge funds such as MF Global. The more they unloaded, the less they needed funding via the Greek charade.
In essence, the pressure on Greece to help the big banks has been greatly reduced. It was one thing for Europe's politicians to press Greece to pay its sovereign debts to help Europe's too-big-to-fail banks. It's something else for them to press Greece to help MF Global and other hedge funds gain from the bonds they were foolish enough to buy from Europe's banks.
The fourth was the realization that the plight of the too-big-to-fail banks had spread to all the banks throughout the European banking system such that efforts aimed at helping only the favored few would not be sufficient.
The fifth was unexpected and an unexpectedly successful effort by the ECB's new president, Mario Draghi, wherein the ECB provided three year low interest funding directly to all the eurozone banks. This obviated the need to route the bank bailouts via Greece and Portugal under the pretense that the funding was being provided to help them stay on the euro. The first ECB loan program was so successful that the ECB announced another round of low interest loans to banks would be available February 29th. It is expected to be double or triple the 489 billion euros initially provided by the ECB.
The sixth was the caving in of Germany and the UK to the establishment of a tough EEC (European Economic Community) fiscal treaty to cover the budgets and sovereign debts of 25 of the 27 EEC nations: Germany because it will, in effect, be lending its fiscal strength and borrowing powers to the other euro nations and the UK because it backed off it earlier threat to veto the treaty if it used EEC institutions which the UK and other non-participants would have to help fund (the UK and the Czech Republic are refusing to participate).
A word of caution
Investors and bondholders should not be gullible and believe everything (or anything) that is promised in the default announcements and the "agreements" and "settlements" that accompany them.
Similarly, investors should not be spooked about the impact of the default on United States' economy, sovereign debt and banks. The Greek default will have only the most minor effect on the United States - except that it will give the White House and its Federal Reserve appointees someone other than themselves to blame for the economy not recovering in 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
