Wednesday, May 5, 2010

Euro Zone Contagion

The following is a great image that shows who owes who money in the Euro Zone.  You can clearly see how interconnected the "PIGS" countries are within the Euro zone.  The arrows pointing outward represent the money owed to the larger countries such as Germany, Britain, and France.

(Click On Picture):

The CDS (insurance) market is showing a full blown assault right now on Portugal. It appears this will be the next leg to fall before the attack moves toward Italy and Spain.

The striking resemblance of the Euro Zone sovereign debt crisis compared to our recent financial crisis is remarkable.  You can compare Bear Stearns with Greece as the government was easily able to step in and stop the first fall.

Portugal can be compared to Lehman Brothers.  With all the backlash and rioting over the Greece bail out which is small in size, will the Euro Zone have the political stomach to bail out the next in line?  If they do not, similar to Lehman Brothers, the contagion will spread quickly and it will rock the markets.

Letting these countries fail and allowing their debt to restructure is the best option for the world economy and the Euro currency in the long run.  However, the worst option (and probably most likely) is allowing a Portugal to temporarily fail which would cause a massive market sell off with banking losses, then stepping in with an even larger bail out plan to stem the tide.  (Similar to the TARP program and AIG bail outs that immediately moved into the trillions after Lehman entered bankruptcy)

In the meantime, pay close attention to the rioting on your television screens over in Greece.  We are the largest bankrupt nation in the world, and the coming rioting on American shores will be far, far, worse.