Despite Greek Solution, Europe Is Far From Being In The Clear

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Now that Greece signed up for an additional 30 billion euros in debt - 130 billion bailout minus 100 billion "reduction" - and growth prospects are virtually nil, one can only celebrate. And Greek Finance Minister Evangelos Venizelos did just that when he stated that "for the first time we are cutting debt instead of adding to it," according to Reuters. If Ace Ventura was the one listening, he would have said "Alrighty then!" We'll be back for the third round.

Although the total damage of credit default swaps as far as Greece is concerned is contained to $3 billion or so, according to the International Swaps and Derivatives Association (ISDA) and as reported by Reuters, the end result is anyone's guess, and only when the legal contracts start to hit the court system or write-offs are divulged, will we know what actually happened. But there's the Depository Trust and Clearing Corporation (OTC:DTCC), which knows what's out there. Not quite, according to Bloomberg.

For example, DTCC's repository covers 98 percent of all outstanding CDS contracts, not 100 percent. Asking why may or may not be a quibble. After all, a map showing 98 percent of the largest 300 cities in the U.S. could leave out New York, Los Angeles, Chicago, Houston and Philadelphia. Moreover, the simple number of contracts tells us nothing about the values listed on those contracts. In principle, the missing 2 percent of contracts could represent a significant fraction of the outstanding value of CDS contracts.

Meanwhile, the ECB's liquidity gap filling mechanism named LTRO is creating a vicious cycle without solutions, and while "bankruptcy" is a dirty word, there's not much that can be devised to avoid the inevitable when the damage has been done. As banks are purportedly buying short-term sovereign debt, that debt will have to be rolled over at some point. Then what? Austerity measures and lack of growth are essentially reducing tax revenues, which in turn are used to pay interest on debt, never mind the debt itself, and even Germany is showing the symptoms, with retail sales dropping in three out of the last four months.

Furthermore, and considering that Angela Merkel is the leading cheerleader behind austerity measures across euro members, Der Spiegel reported that "Germany Fails To Meet Its Own Austerity Goals."

This lapse is particularly embarrassing for the German government because the news comes just after 25 European Union member states agreed in early March to an international fiscal pact obliging them to adhere to greater fiscal discipline.

Mario Draghi, the chief of the European Central Bank, keeps playing whatever cards he has left, but the bank's political independence was put in perspective by an interesting statement delivered by Angela Merkel, as reported by MarketWatch.

German Chancellor Angela Merkel on Friday said the European Central Bank's recent liquidity operations have bought time to solve the euro-zone debt crisis but won't be repeated. "We will certainly not take such additional measures. The liquidity goes out of the market again."

We? Yes, we know who's in charge. As it has become increasingly clear that the European Union is a "concept" that is only valid during good economic times, nationalist sentiment continues to manifest itself in various forms, with the Dutch Freedom Party calling for a return to the Guilder, according to The Telegraph. It will only get worse, and the finger pointing will cover a variety of topics, with illegal immigration now the issue, according to Reuters.

"The question still remains what happens when a country is not capable of securing its borders, as we see in Greece," Germany's Minister for Justice, Hans-Peter Friedrich, told journalists after a gathering of EU ministers. His remarks were echoed by Austrian home affairs minister Johanna Mikl-Leitner. "We need to put political pressure on Greece to implement their asylum authority as rapidly as possible. This border is as open as a barn door."

As we move forward, we will be pounded by a rainbow of rosy projections and messages of hope, while the patient is flatlining and the complex schemes to keep the charade alive will continue to provide enough smog to keep all of us in the relative dark. But balance sheets don't lie, some will say. Well, it depends.

The case in point is best highlighted by the Der Spiegel article "Euro-Zone Central Bank System Massively Imbalanced."

More than a year ago, German economist Hans-Werner Sinn discovered a gigantic risk on the balance sheets of Germany's central bank. Were the euro zone to collapse, Bundesbank losses could be half a trillion euros -- more than one-and-a-half times the size of the country's annual budget.

It's extremely troublesome that the Bundesbank told Mr. Sinn not to worry because "those were irrelevant balances." Mr. Sinn wasn't satisfied, and after much work, the conclusion was simple.

"We're caught in a trap," Sinn says. "If the euro breaks apart, we're left with an outstanding balance of nearly €500 billion, owed by a system that no longer exists." That figure, €500 billion, is more than one and a half times Germany's annual federal budget.

The fear that the grand currency experiment will fall apart is highlighted by the conflict between the ongoing rhetoric to get Greece to exit the euro and the unabated flow of funds. Where else can one walk away from 100 billion in debt and receive yet more money?

The complete demise of the euro is without a doubt the worst case scenario, and I have faith that something less malignant will take place, although what the end result will actually look like still escapes me. But that is also thanks to the lack of transparency that permeates the European political landscape, and other governments around the globe are no different, mostly because they are too busy covering their tracks. Then again, we can recall plenty of past statements by a number of public officials and corporate officers that assured us that whatever we were looking at was "irrelevant," only because we didn't understand the art of accounting. "Alrighty then!"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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