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Thursday, May 6, 2010

Next Stop Debt Contagion

The equity markets have been in free fall all week and the main reason is something called debt contagion. The troubles in Greece look like they may spread to countries like Spain, Portugal, Italy and others we don't yet know about. We're now learning that the Greeks hid their debt troubles through a complicated set of accounting tricks. So, the markets are not only fearful that this bailout won't be enough to save Greece but that others will fall like dominos.

The ink was barely dry on the $150 billion European Union/International Monetary Fund bailout of Greece, when world stock markets tanked on two major fears. First, financial analysts are concerned that the bailout money won't be enough to cover Greece's borrowing needs from its out-of-control budget deficit. Second, there are fears that the EU/IMF deal will not be approved by the German parliament in a vote scheduled for Friday.

Additionally, there are new worries that the Greek debt contagion will spread to Spain and elsewhere in Europe. The looming specter of debt default and deflation is heavy in the air for investors worldwide.

Making market matters even riskier,German Chancellor Angela Merkel faces key regional elections this Sunday in populous North Rhine-Westphalia, including the conservative areas of Cologne, Bonn and Stuttgart. These cities hate government debt and overspending as much as the rest of Germany, if not more so.

In fact, we've seen this before. In May of 2008, Bear Stearns was bailed out and we averted disaster for about four months until we couldn't do the same for Lehman Bros. So, if history is any guide, a bailout means run for the hills in equities and they've responded in kind.


Jason Gillman said...


An apt name for a problem so closely associated with socialist policies and a bloated public sector union issue.

AG said...

I can't help but wonder if this rampant panic selling of everything vs. the US Dollar is intentional. Germany knows it can't bail out everyone, and they know that the European Central Bank would sooner watch Europe burn than lower interest rates, much less commit QE. Three's no way around it: the Euro *MUST* devalue. There is no alternative. Sewing uncertainty about what's going to happen is the only thing the EU can deflate itself.