Denial Rises As Euro Crisis Darkens

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Europe’s banking crisis is ramping up from dress rehearsal to an opening night drama as Greece plays the part of Lehman Brothers in the 2011 remake of the 2008 Credit Crisis…

And, like any Greek tragedy or Shakespearean drama, the players play their part upon the stage and utter their lines…

And the dialogue is stunning in its conflict, the players intense in their levels of contradiction.

And only at the end of the play will we know whether “all’s well that ends well.”

But in the meantime…

The picture has darkened…

There are conflicting reports of how bad the crisis is and how soon the crisis will be resolved, if it can be resolved at all..

And how well the responses may or may not be working…

Last week, for example, European Central Bank (ECB) head Francois Trichet, Europe’s version of our very own Ben Bernanke, said that the ECB was not in danger and that it had “performed impeccably” in its response to the debt crisis...

By buying up bad debt from around Europe…

And accusations that the ECB is at risk?

Mr. Trichet’s response was spoken with great indignation…

Meanwhile, the Eurozone is collapsing—impeccably, mind you--all around him.

Of course, there are always pitfalls in semantics…

What is said by one versus one what is not said…

Or what is done for an audience while something else is done behind the scenes; leaves much room for speculation...

And people and events are very much reactive to rumor and how things are phrased…

Some are more blunt—or honest—than others…

For example, Mario Blejer, a former Bank of England adviser who managed Argentina’s central bank after its 2001 default, said that “Greece should default, and default big. You can’t jump over a chasm in two steps,” Mr. Blejer noted.

He has a point.

Mr. Blejer has also noted the irony in the “rescue plan” for Greece…

Just who, in fact, is the plan designed to rescue?

He elaborates…

“Rescue programs backed by the International Monetary Fund and European Central Bank  are “recession creating” that will leave Greece with more debt relative to the size of its economy in coming years and stifle growth.”

Rescue plan indeed.

We have come to the same conclusion in this space, but there is always someone else to sugar coat an otherwise perfectly clear outcome…

This is at odds, for example, with German Chancellor Angela Merkel, who said she’s “’very optimistic”” that Finland’s demands for special collateral as part of the Greek bailout package will be met.

This implies a “very optimistic” viewpoint that a Greek default will be avoided…

A viewpoint that is not shared by neither the banking community in Germany nor in Europe…

Nor, as it turns out, in the US…

Pacific Investment Management Co.’s Mohamed A. El-Erian told Bloomberg that…

“We’re getting close to a full-blown banking crisis in Europe. We are in a synchronized global slowdown. There’s very little confidence in economic policy making both in Europe and the US.”

And Mr. Blejer concurs with Mr. El-Erian, saying that Greece’s default would lead Portugal to default and probably Ireland to do so as well.

As such, other major European banks struggle against the outgoing financial tide…

Frances’ largest lender, BNP Paribas SA, was obliged to deny a report saying the bank could no longer borrow in dollars…

While they sell assets to raise $5 billion in liquidity and have lost 50% of their market value since July…

And is also why Moody’s Investor Services, Inc. is close to downgrading France’s three largest banks…

But French is the language of diplomacy and subtly…and now, apparently, denial…

As French Finance Minister Francois Baroin and Bank of France Governor Christian Noyer denied any liquidity crisis within France’s banks.

Mr. Baroin said that “There is no urgency for banks that are being slaughtered on the stock market as they all have the means to respond.”

Ah, the old, “moving backward to advance” strategy…

Meanwhile, yields on sovereign debt in Italy, Spain, and Portugal are rising daily…

But nothing like Greece, who will pay, or rather, offer to pay 75% on a 10 year bond.

And what about the Greeks themselves, who are at the center of the storm?

Well, the tax-collectors and customs agents—those who collect the taxes to pay for the austerity measures that will prevent Greek default?

They’ve gone on strike to protest the austerity measures levied against them to pay for the bailout…

Measures which haven’t yet fully hit…and which probably never will…

Because Greek default will be a messy reality by then…

Why do I say this?

A Greek bond with a March 2012 maturity date traded Monday at 55 cents on the euro, with an implied yield greater than 200%...

But those crafty Italians, on the other hand, are following the footsteps of Marco Polo and are noodling the Chinese to buy some near-worthless Italian bonds…

Which should be very enticing to the Chinese…

Since they would like to diversify their portfolio full of near-worthless American bonds…

I swear…you can’t make this stuff up.

And those are…The Gorrie Details.

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