Solving Greece Didn't Solve Anything

by: Karl Denninger

The buzz this morning, coming from multiple sources (all of whom so far insist on being unnamed) is that the Greek "restructuring" is going to be declared a credit event and trigger the CDS.

Before everyone goes "Boo!" and runs to hide under a rock, the net exposure involved here is in the single-digit billions. It's not that large.

As with most things in this venue, it's not the singular event that poses the problem. It's the precedent, and "who's next": In this case, Italy.

As I and a few others pointed out originally "solving" Greece did nothing, because the problem wasn't Greece per-se; it was the entirely-unsustainable debt picture worldwide, of which Greece was a symptom.

The S&P 500 rallied more than 200 points, roughly 20% in a couple of weeks, on the premise that it would all be ok once Greece was resolved. As I pointed out at the time this was idiotic - resolving Greece was not sufficient as the underlying problem is not that Greece is in trouble, it is that there is too much leverage in both the European and American economies.

This morning Europe is rethinking their "rallying cry" with Italy showing lots of trouble. For those who were paying attention last week didn't see much movement in the credit markets -- certainly not what we saw in the stock market -- and history has shown that when it comes to the credit and stock markets the folks in the stock market are IQ-challenged.

In fact, the entire rally last week looked a lot like machines playing the dollar and reflexively buying as the dollar declined:

Gee, that correlation is pretty striking, isn't it? Sure looks like it to me.

More stunning is that when you look at the Euro of course it's the other way around, and yet Europe rallied as the Euro got stronger.

Such are the foibles of being the "reserve" currency, I guess, or perhaps it's just that we have a lot of robots. Whatever the case may be, this sort of stupidity always winds up correcting itself; it is simply a matter of when, not what.

In any event this week should be quite interesting; the declaration of a credit event will not help things over in Europe, and yet it appears not inevitable but necessary. If it's not forthcoming then the declaration made is that CDS are worthless when it comes to sovereign debt, and you can expect a wee problem with subscribing future bond auctions "over there." On the other hand if it is forthcoming then you can expect the speculators to look at the actual credit picture of the other nations "over there" and to act according to what they find.

How's it feel to choose between sticking your neck in the guillotine or sitting in a chair that has big copper straps running up the back, arms and legs, along with straps you can't avoid touching all of them?

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