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10 Reasons Why There Will Be An International Solution For the PIIGS

As a long time fan of Yahoo! Finance as one of the very best general investing websites, I regard it as something of a bellwether for the financial mass media. It seems they may finally be getting it. See Aaron Tasks' Why You Should Care About Greece: Panics... in which he touches on just some of the points below.

As I noted weeks ago in Here's Why Southern Europe Will Not Be Allowed to Default and other articles:

· Domino Default Effect: Just one sovereign default is likely to scare markets into raising borrowing costs beyond what the PIIGS can afford, effectively sending them into default over the following months.

· Second Leg of 'W' Shaped Recovery: Looking at the collapse of the credit markets and Lehman Brothers in the fall of 2008, we can safely assume the at least as bad a reaction. More likely it will be worse, because markets are more nervous, and governments already loaded with growing deficits and swollen money supplies from prior stimulus and bailouts. Like an already seriously ill patient, their ability to fight off another illness is weakened. Expect a repeat crash of credit and asset markets, more forced stimulus (aka money printing) and ultimate currency devaluation (long term great for hard assets).

· Greek Default Costs The EU Regardless: The stability of major German, French and other EU banks will be shaken because they hold billion in PIIGS block bonds, quite possibly forcing their governments to bail them out. Granted, at least this amount is quantifiable and finite.

· Despite Risks, No Solution In Sight: Yet the PIIGS nations have yet to show real willingness to accept the pain of draconian austerity measures, and EU leaders have been unwilling to commit political suicide by making their struggling voters bear the burden of a bailout. Both sides will need to pitch in, as Greece needs about 20-30 billion in the next 8 weeks to roll over maturing bonds, and has about 7 in its treasury. It will be bankrupt before any austerity measures can take effect. Again, once Greece goes, the rest of the PIIGS block will likely be beyond access to the bond markets at affordable rates. Thus whether aid is from the EU, IMF, Zeus, or Santa Claus, Greece must have some combination of cash AND loan guarantees to pay its bonds at issue new ones at affordable rates.

· Conclusion: EU Needs International Aid: If for no other reason than that EU leaders can say their voters aren't bearing the burden alone, and that EU leaders made the best deal possible. That is key for breaking the current paralysis.

Note: While the EU will likely try to simply offer guarantees on PIIGS bonds to keep their bond rates low enough, that too ultimately puts Northern European taxpayers at risk of paying for PIIGS mismanagement, unless the PIIGS submit to effective takeover by foreign bankers overseeing their budgets. Thus even loan guarantees may prove politically unacceptable.

In Aaron Tasks Why You Should Care About Greece: Panics..., he also raises the risk of political unrest spilling over into regional/global conflict. That's another legitimate risk.

Of course, this is far from the only article out there, but is a good sample of what we are seeing more and more. We suspect this is a precursor to rescue on a grander scale.

JUUABRICs To The Rescue?

Together, the above risks give EU leaders a compelling case to approach the JUUABRICs block (Japan, US,UK, Australia and BRICs) to chip in, at least in order to allow EU leaders to face their voters and say that all are sharing the pain in order to avoid potentially worse dangers.

The Case For A Combined JUUACBRIC, EU Rescue Is Compelling

For the JUUs block (Japan, US, UK), their deficits are especially worrisome, and a global fear inspired spike in sovereign bond rates would greatly complicate their recoveries.

For the exporter based economies among the JUUACBRIC block (all but the US, UK), a global economic crash would again cripple demand in the export markets on which they depend.

In Aaron Tasks article,he also raises the risk of political unrest spilling over into regional/global conflict. That's another legitimate risk.

The only other alternative is to accept that the PIIGS, and the global recovery, is beyond help, just let it happen and take it from there, at least without another year's worth of GDP spend in stimulus and added to sovereign deficits.  Arguably a solution, though beware politicians will do all they can to prevent a collapse while they were in office.

The Key To It All

Ultimately, the final responsibility rests with those who started the problem, the PIIGS themselves. Note that for this global rescue to work, the PIIGS block would indeed have to submit to international supervision of their economies. Otherwise, their otherwise reluctant but resigned rescuers would fear they are just throwing more cash down a bottomless pit.

How To Profit

Until this solution, or another is clarified, the clear overall theme is to be bearish risk assets, bullish safe haven ones. View any rallies in risk assets based on vague rumors like that of Tuesday as opportunities to enter new sell positions.

· Of the risk currencies: Short-EUR, AUD, GBP, NZD, CAD, and UDN. Long: USD, JPY. Avoid going long on the CHF because Swiss National Bank intervention attempts to keep the CHF from rising vs. the Euro. For ETF traders/investors, that means short: FXE, FXA, FXB, BNZ, and FXC. Long UUP

· Short dollar hedge commodities like gold and oil, both of which are relatively high now.

· Short stock indices

Yes, long term the safe haven currencies also have deep problems, but over the short term they are the least ugly, and that will be good enough for them to continue their rally, barring "rescue rumor days" like Tuesday.