Five Minutes to Midnight in Europe

01/25/2012 12:15 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The fairytale market revival of the past month could soon fall victim to the grim reality, writes senior editor Igor Greenwald.

It’s been quite a month for Cinderella.

The rags she wore for most of last year have been transformed into a designer gown. Bank of America (BAC) rats gnawing at her meager savings are just a bad dream now, turned into Lipizzaner stallions overnight. She’s danced and had a ball and has been waiting to make that stairway dash for a while.

But no clock has struck. The euro’s kissed $1.30, Italy can borrow for three years at less than 4.5%, and China has a major crush on Siri. Has time stopped, or are all the clocks in need of winding?

Alas, the darkness outside signals not midnight, but calamitous weather. And the longer Cindy stays, the more she risks. This fairy tale could turn cautionary at any time.

As Greece staggers toward an inevitable default, we’re reminded that its creditors would have been much better off taking the hit two years ago. Back then, the Greek economy was merely in a recessionary stall; now it has imploded.

The two rescue packages announced since have simply diluted private lenders with public loans. And the hapless bankers who might have been strong-armed into a workable restructuring in 2010 have since sold out for pennies on the euro to the aggressive hedge funds very likely to get their pound of flesh via lawsuits.

Next up is Portugal, which two years ago was a low-rent fixer-upper in need of a little TLC…and now, one European rescue and a Berlin-approved austerity program later, is a basket case almost as bad as Greece, another bottomless money pit that Europe can ill afford.

Waiting in the wings are Ireland and Spain, the former very likely to default on bank debt guarantees it foolishly assumed at Europe’s insistence, the latter still in budget-cutting mode despite unemployment above 21% and a burst property bubble that’s choked off private credit.

The longer they remain on their current track, the more human and financial capital defects to less deflationary climes. It’s all well and good to buy time if reinforcements are on the way. Buying time while your reserves melt away should be less appealing.

The latest canary in the European coal mine is the Swedish telecom equipment maker Ericsson (ERIC), down huge today after posting disappointing results amid a margin squeeze.

There will be more blowups along those lines so long as austerity remains the answer to an inflexible currency regime that’s rendered much of Europe, including France, increasingly uncompetitive relative to workers in Germany and Scandinavia.

The Greek default, whether it comes next week or in March, is likely to announce the bankruptcy not just of Athens, but of the ineffectual fix improvised in Berlin, Frankfurt, or Paris.

It’s a message Europe desperately needs to heed before the clock strikes midnight.

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