The European debt crisis continues to cause turmoil in the European economy and great uncertainty for the global economy.  Investors are beginning to wonder if we’re on the verge of a Lehman 2.0 type event.  Of course, if we’re due for a Lehman then we have to first serve up our Bear Stearns, right?  And that’s exactly the fear here.  The fear is not necessarily that Greece will default, but that Greece will lay the foundation for even larger defaults.  And that’s where Spain comes in.  Spain, in my opinion, would pose a bailout so large that it could very well become politically untenable.  Greece and Ireland and Portugal are one thing, but Spain is twice the size of these three countries combined!

In the end, I still think that the Europeans have but one choice – suck it up, bail everyone out, and kick the can until you make the EMU a viable currency system.  In the meantime though, keep an eye on this chart.  Bond vigilantes in Europe could push Spain to the brink of disaster.  And that could make everyone involved in this currency system reconsider its existence.  In the end, it could very well push this crisis into a phase that no one wants to experience (again).


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • VRB Ii

    CR- I respectfully disagree with u about bailouts. Having read your pieces I gather there’s more to this then whAt u wrote. To the tune of a central bank i.e US system etc.
    No losses should ever shift onto those who would not have benefited had there been gains. Every citizen should have the right to services and be taxed for those. But no population should wake up to a liability put upon them by anothers recklessness. if pain is what u get from bail out withdrawals. Then let’s get started. It s silly to think u can deferit or that it’s ok to put this onto the public

  • VRB Ii

    I do like the chart… I wish my investments looked like that

  • Brian Ripley

    Wouldn’t Nassim Taleb’s idea (surely it is not his idea alone)that the most direct solution is to let debt be converted into equity. My understanding of that is that debt is either repaid by the borrower, or failing that, the lender takes over the collateral and writes off any shortfall. Is it not that simple?

    The following is from:

    10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

    Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

    In other words, a place more resistant to black swans.

  • Piccola Economista

    What does servicing the Greek debt (0.8% of EU GDP) equal relative to the $16.1Tn economy of the EU?
    And if 96% of that debt is held by EU members (ala BIS 2010 stats), isn’t it just recycling within the borders of the ECB ?
    Mountains out of mole-hills?

  • Reelin

    See your point but so do European politicians, even though from the outside it still looks they don’t. They’re perfectly aware that some sort restructuring is unavoidable, the sooner the better. One of the desirable side-effects will be a coherent Eurozone who finally starts to unite fiscally. It will be either imposed by markets or decided (in extremis) by the authorities. The latter are in a dilemma since giving up local power in favour of a more united Europe is the price to pay. Hence the can-kicking. Let’s just hope these guys get their act together soon so we could tick on item of the trouble-list.

  • J

    You are missing the point. Stop living in fantasy land. A bailout WILL happen whether we like it or not. This is reality. I don’t agree with this line of thinking just like you don’t and as I’m sure it’s not CRs preferable way to deal with it, however past actions have deemed this as the only choice.

  • Dr. Oliver Strebel

    The spanish debt over GDP ratio for 2010 is 63% contrasting to 94% of the USA (IMF figures). And ECB will buy also spanish bonds as it bought greece bonds and as the Fed bought treasuries. So there should not necessarily arise a problem.

    However there is a jewish proverb saying: “If everybody says you go bancrupt, you very likely will go bancrupt.” And one can try to talk poeple into bancrptcy.

    And there are other measures for the likelihood of a government default. Some economists correlate the corruption index with the likelihood for a government default. Corrupt countries have the tendencie to consumpt revenues instead of investing them, because their leading poeple behave in that way. This increases the probability of a default, also because their corrupt leaders aren’t shy to put the country into a mess.

    According to this measure the situation does look not so nice for Spain an Italy.

  • Smith

    Bailouts can solve all of our problems…..

  • Somnolento


    You, Mosler, et al really need to combat this kind of dangerous nonsense:

  • quark

    This argument seems to miss the point that we live in the US and this gives us an entirely different and inaccurate perspective. The Euro was doomed from the outset and if one paid enough attention to how the Europeans failed to enforce the rules for debt to gdp etc. you would have assumed that this was just another poorly run bank destined to fail.

    The Europeans are now the Americans of the early late 1700’s-1800’s who were viewed by Europeans as misfits who would never get along well enough to form a central government. We proved Europe wrong and perhaps they will prove those who doubt the European Union and its unified currency. That said the US went through 2 wars, one to break itself from tyranny and one to settle a dispute about commerce and slavery.

    The bailouts do nothing more than place austerity measures on unwilling populations, much like the Queens tax. Citizens simply will not stand for it and it will result in the repudiation of debt obligations and the German people will not take the role of Washington just to bail out what they view is an undisciplined GROUP of nations. The Germans are a logical group and it linear logic that the Germans see connecting the bailout by the Germans of Greece to the bailout of the PIIS.

    The motivation behind the belief of the optimum European outcome could only be done by this generation of delusional Americans who still believe that there is no affect to cause.

  • Cullen Roche

    We try….

  • First

    “bail everyone out, and kick the can until you make the EMU a viable currency system”.

    Big Euro banks sleep with the Governments, some are still partly owned by them.
    lending money to irresponsible politically motivated technocrats that all come from the same school as there Corpocrat banker’s friends such as “Ecole Nationale d’Administration and the Ecole Polytechnique” in France.

    Bureaucracy in Europe command a lot of prestige and power. Its the Gauche caviar(Caviar left). If they had there way they would tax the world via the UN.
    As several Euro countries are reaching the end of fiscal idiocracy they need to transfer the cost of there mistakes to the general public.

    They is no bailing out Greece they is a baling out of the huge international Banks that made those stupid and irresponsible loans to Psychopathic Politicians. There answer is screw the people by taxing, bail out the lenders by pretending and scaring the public that if not there will be a economic collapse, dilute the Euro and the more responsible countries in the process.
    The Feudal Socialism aristocracy is still untouchable.

  • innertrader

    “FIRST” is on the money. It’s ALL about the New World Order, i.e. SOCIALISM!!! It ALL leads back to that. It’s what oh Bama is creating in the USA, to be just another spoke in the wheel of the Socialist New World Order. When one looks at the picture from 100k feet, it’s perfect… IF you believe in Socialism! What’s amazing is that your kids are being taught it with your money! It’s really rather funny. I never thought that I’d see the USA loose it’s Constitution on my watch, but it has and is! The ASSAULT WEAPON gun running by the USA government was designed to cause havoc within the USA borders, so that it would help them with their goal of disarming America citizens through “gun control”. But they got caught, however, the real story has not surfaced and it’s just a set back for them. Next time, they’ll get away with it. But it’s “ALL” connected!!! The NEW WORLD ORDER is here and in control! Take from the rich and give to the poor to make everyone the same; unarmed, broke, desperate and therefore, easily controlled!

  • W Mitty

    I have lined my hat with tin foil and I’m ready for THEM!

  • KB

    “In the end, I still think that the Europeans have but one choice – suck it up, bail everyone out, and kick the can until you make the EMU a viable currency system.”

    I am really pleased to finally see a clear recipe from MMT’er on what should be done to mend balance sheet recession. These lines for me are worth much more than hundreds of pages of empty theorizing.
    It would be extremely helpful to see similar concise comment regarding US. Obviously, it would be even better to see it in “what would happen vs. what I think should happen” format…
    I am not expressing any judgment regarding the above-mentioned statement, and I highly value your investment opinion. Such a statement just helps me (as a practitioner) to understand your logic.

  • tim

    Comparing the European experiment with the American one is to fail to understand what the latter was all about. The American experiment was one of implementing ideas that had never previously been institutionalized. The attempts at European unity have always been, instead, about power — for bureaucrats, for economic competitiveness, and for the hoped-for political/economic union. The American one was about the longing in the human heart for freedom, rather than a lust for power and wealth.

    Consequently, the American experiment was fated to endure vibrantly for well over a hundred years, and to continue on with increasingly less virility for an additional hundred years. It has now died, as its heirs have now become like virtually all other nations, obsessing about wealth and power and abandoning their heritage. The country obtained remarkable power as a result of its initial virility, and the strength of the system its founders implemented enabled it to continue to flourish long after their ideals had withered. The populace is not even aware of what they have lost, and about half are now on the public dole.

    The Constitution upon which American unity was based is ignored by the political leaders in the U.S. at every level, and the citizens are not perspicacious enough to even realize it. They have taxes and regulation imposed upon them many orders of magnitude more oppressive than the Queen’s Tax ever was, but they obediently roll over like the faithful dogs they are. The politicians of both political parties manipulate the ignorant voters into doing the government’s will.

    Europe may be able to impose an external unity upon its citizens for a short period; but lacking the moral ideal that unified Americans (although not their “leaders”) for the better part of two centuries, the European experiment will neither prosper nor endure. The Euro was a shortsighted experiment that ignored the disparate needs of extremely diverse countries. A union based on a currency rather than a noble ideal is doomed to not more than short term success.

    All men are created equal, and are endowed by their Creator with certain inalienable rights… Not quite the same thing as, “Let’s all share a common currency, so we can gain a financial and political edge!”

  • clive

    The money will have to be printed for the bailouts

  • knight


    Do not believe this started on President Obama watch. It first started with Bush jr and his marry men of bandits. Obama hasn’t done anything to change it but at least give credit where credit is due. Bush jr started illegal wars and illegal transfer of wealth from mistakes of bankers on to the US taxpayers. I am sure glad I don’t live in the US otherwise I would be livid to see where my tax dollars are going.

  • Frenchy

    The thing is that they can’t as long as they are not a viable currency system.

  • First

    Yes, and some of this printing will again come from the US funding European Bailouts through the IMF at about 18-20%. One would think that at least if printing is to be the new financial salivation that almost bankrupt states with in the United State would come first before bailing out European state members.
    Greece will not change its way any time soon it cultural.

  • First

    Obama hasn’t done anything…….. You can say that again haaaaaaaaaa

  • VRB II


    We are either moving towards a productive society or away from one.

    Bail Outs move a society in the wrong direction. I won’t lecture…It’s Friday and I’m meeting my son and wife for a nice lunch so
    As much as I love my son..and it’s alot…bailing him out from his mistakes hurts his long term growth. Simple yes. We complicate things and it’s that simple.

  • Cullen Roche

    The USA should cut taxes and avoid any forms of QE that might offset the fiscal boost.

    Europe needs to move towards becoming a US of Europe. Otherwise, they should let the periphery nations defect and bring back their old currencies. I don’t think that’s the direction we’re headed in though. I think they’ll kick the can and eventually make the fiscal payments that will create some pseudo form of US of Europe.

  • D

    If only. Someone gets squeezed on the default. That someone then squeezes another and to think it’s just Europe would be ideal. Review the post from a few days ago regarding who has written the cds insurance …

  • VRB II

    CR- good piece on The Big Picture. Thought you and TPC would enjoy.

    Have a nice weekend Cullen.

  • Oroboros

    This may be pretty important, too …

    Biden, Lawmakers Determined to Cut $4 Trillion, Send Signal

  • ed

    I think that Greece, Portugal, Ireland and possibly Spain will be kicked out of the European Union with eventually just 10 core members left. Hey it not only makes sense but it’s Biblical

  • billw

    The USA has been through this same type of event before in the 1930s when we called it a Depression. We threw a lot of money at the problem then just as we are doing now ( then it was in the form of numerous make work projects) , and it still did not prevent the inevitable. This Great Recession will have to get a lot worse before the liberal media and Dems stop crucifying anyone that proposes a real long term solution. Eventually ( which is coming sooner rather than later) the money runs out to put off the inevitable ( or the value of said money is worthless).

  • SkySavage

    A bailout simply cannot happen. This is the problem, and the point. There is simply not enough money to bail out Spain, which has over 5x the debt overhang of Greece. It cannot be printed without completely destroying the currency system, and it cannot be found any other way. Bailouts must continue, but only so a bailout of Spain might be avoided.

  • Michael Patel

    During the Depression we also had a lot more people working on farms, with the midwest suffering from severe drought conditions, and nations restricting free trade which created even a longer depression than just letting the system work its way through.

    The trick is to get people with actual cash to spend it. There will always be individuals with cash and very little debt on their balance sheet. Corporate bank accounts are sitting on $1 trillion worth of cash or equivalents. 30% of homeowners own them free and clear. I am debt free also but I will not part with my cash unless I feel like I am getting a good deal.

    The key is to encourage innovation and investments that will create jobs. Congress needs to pass measures that increase corporations and individuals to part with their money for the greater good of human kind. Helping people part with their hard earned funds on speculation, gambling, and financial shenanigans will be a detriment to our society in the long term.

    I don’t have much faith in Congress to act decisively on these matters since big disasters, Fannie and Freddie, were directly under their supervision. The American public are also getting tired every passing day with our governments actions and inactions. It is going to be a long drained out process and confidence will not be injected into our economy unless Congress starts spending funds efficiently or they pass measures that convince the public to spend more. Tax increases for the billionaires and more tax cuts for everyone else is just a starting point.

    Be prepared for slow growth for the forseeable future and invest your funds where you see value with a large margin of safety. It will be a long slow process for this to work itself but what made this country great has not been lost and we will succeed and pull out of this recession eventually.

  • Andrew P

    In the year running up the Lehman, LIBOR was steadily rising, and then continued to rise until the TARP was enacted. Those rates are really low right now, so the markets are not expecting a meaningful counterparty failure risk. And that is ultimately what the risk is in defaults. The EU situation is not even remotely similar to what was happening in 2008.

    Greece should simply default and get it over with.

  • Andrew P

    Then why is LIBOR so low? Obviously the markets have very little fear that a Greek default will render major counterparties insolvent.

  • boatman

    libor has it priced that bailouts will work.

    wrong…..this all goes in toilet.

  • D

    I have no direct answer but rather a question in return; how did libor behave in the summer of 2007? I have a hunch it was similar. My thoughts are this, the banks who have extended the loans are facing declining growth through the austerity squeeze which becomes a negative feedback loop. When Greece falls it only puts more strain on the already strained. And it’s our banks that have written the swaps…

  • Grand Supercycle

    A Big Move is coming.

    S&P500 monthly chart show a series of broadening patterns, aka megaphone wedges.

  • mmd

    we know by now that a single currency is not viable long term without the political union that comes with a central fiscal authority . european states need to decide if they are ready to take that plunge. the soveriegn debt crisis is related to this issue. but lets not forget that european states have rejected the easy option – print money. the ecb was made in the image of the bundesbank and the ghost of the weimar republics hyperinflarion continues to haunt it. unlike the fed, the ecb will not print a trillion euros and use that to buy givernment debt.. eurooe is doing the right thing in taking the pain upfront in this sense.

  • Jack

    It was obvious that the banking sector was overheating the moment Clinton approved the repeal of Glass Steagall. That was as clear an indication as anyone needed that the banking system was about to become overleveraged, that with their ball and chain removed Wall St. was about to rip the arse out of banking. What did European regulators do? Sweet FA. Instead of instructing European banks to become very conservative very fast, they allowed the orgy to continue. They and their finance minister bosses should be prosecuted for embezzling their salaries from the taxpayer. At least this debacle proves one thing, Mrs. Thatcher was correct when she said that Europe should have a common currency, not a single currency.