A Four-Alarm Celebration

06/15/2012 5:05 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The Greek election and promises of extra liquidity from central banks are not cures for what ails Europe, writes MoneyShow.com senior editor Igor Greenwald.

You know when things are going great? When the firefighters show up to spray foam all over the runway. Because that means the plane will be on the ground soon and the survivors can get on with their lives.

The world’s central banks were said to be unrolling their money hoses yesterday, prepared to spray soothing liquidity on anyone perturbed by the results of Sunday’s election in Greece. Greece, would, of course, get not a drop of that. It’s lucky the European Central Bank is still financing withdrawals from Greek banks by depositors who wish to keep their euros somewhere safer.

The truth is that Greece has been condemned to roll a boulder up a mountain for decades to come, for the sake of the European banking system. Which is crumbling despite this less-than-noble sacrifice, downgrade by downgrade and rescue by failed rescue. But Greece could possibly speed things up on Sunday, if it elects enough of the wrong sort of people, which in this case means people who know a dead end when they see one.

This is deeply troubling to all the big European banks, which are still pretending that their Spanish and Italian notes are every bit as money-good as German bunds. And Italy and Spain are nothing but Greece writ huge: countries with a large and growing debt and no way of paying it back without growth, impossible any time soon under the austerity demanded by Germany.

Greek and Spanish banks are down to the European Central Bank as the lender of the last resort as depositors continue to withdraw their money. Nothing that happens in Greece on Sunday will stop this process, much less defuse the three-year-old crisis.

The notion that we will have some sort of do-or-die climax this weekend is the conceit of barkers who said the same thing about a dozen previous European summits.

In the meantime, Spain’s been effectively shut out of public markets, at least at long-term rates it can afford, by its decision not to liquidate troubled banks or to inflict losses on their shareholders or bondholders. Those investors have effectively jumped the credit queue at the expense of Spain’s taxpayers and creditors. And the creditors, of course, are none other than Spanish banks, waiting to be rescued by a sovereign deep in hock to them.

This is Europe’s way of coping with the reciprocal and unsustainable debts blocking its economic arteries. In truth, the patient is having a heart attack but has been painfully slow to realize it.

In such cases, liquidity backstops from central banks are every bit as useful as an aspirin. But they’re hardly cause to break out the champagne. I’d save that for when Europe’s growing again and its citizens are putting money into banks, instead of rushing to get it out.

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