Cliff Wachtel's  Instablog

“European Union policymakers are so busy building firewalls within the 17-nation single currency area and devising temporary fixes to avert immediate disaster that scant thought is being given to how the story ends.

Next week, EU leaders are likely to buy a little more time by approving a second bailout for Greece, barely a year after Athens was granted a first 110 billion euro assistance program from the EU and the International Monetary Fund.”

“Funding fatigue is growing in the north European creditor countries, especially Germany, the Netherlands, Finland and Austria, just as austerity fatigue is mounting in Greece.

Yet all the indications are that EU policymakers have as little clue about the endgame…”

No one in Brussels, Berlin or Frankfurt even pretends to believe the new package will solve the problem of Greece’s debt mountain, already at 150 percent of annual output and rising.”

“…In private conversations, the most optimistic European officials say the second bailout may keep the show on the road until mid-2012. Pessimists say it may only hold the crisis at bay until after this summer.” (!)

Despite on prospect of continuing bailouts, most economists believe Greece faces continued austerity, and both bond holders and taxpayers of both Greece and funding nations will suffer losses

No official thus far willing to discuss default because that would be an admission that they’ve wasted taxpayer’s money.

Reuters concludes the next likely Greek crisis could start with Greek banks, which are steadily losing depositors who are fleeing elsewhere, or it could start with popular uprising that makes further austerity a political impossibility.

It’s worth noting that the real danger of default from Greece (as well as Ireland and Portugal) is not in the size of the default ( that could be absorbed) but in the risk that all other PIIGS nations are seen as default risks and are no longer able to sell bonds, sparking a spreading wave of sovereign defaults and insolvencies by the financial institutions that either hold the bonds or have written insurance against their default.

What does it mean? At some point when the defaults hit expect a massive pullback in risk assets and in the Euro in particular. Timing this however, is very tough because default depends on unpredictable political decisions. The prime safe haven currencies (CHF, JPY, USD) and their government bonds, warts and all, may be the biggest beneficiaries.