Bill Fleckenstein: Greece debt crisis tests European Union, US stocks

Contrarian Chronicles5/7/2010 7:00 PM ET

Euro trouble won't end with Greece

Even if a solution can be found that keeps Greece in the eurozone, bigger nations face similar difficulties. And in the US, we may be seeing the recent rally fail.

By Bill Fleckenstein
MSN Money

Updated May 10, 2010.

How will the Greek-inspired carnage resolve itself? Will Greece leave the euro? Will Germany? Will the European Central Bank buy government paper, the way Ben Bernanke's Federal Reserve has?

The ending is not clear, but here's something that is: There's virtually no chance that the Greeks (who have defaulted on debt often in the past) will be willing to adhere to austerity measures just so they can use a colored piece of paper -- the euro. Especially since government workers, the folks who would probably have to give up the most, are the most entrenched.

And if by some miracle Greece could put the genie back in the bottle, it would remain to be seen what would happen with Portugal and Spain. An oft-cited source, a friend I call the "Lord of the Dark Matter," weighed in on the subject; he spoke after a Greece rescue package surfaced last week, but before the European Union pieced together a bailout package worth nearly $1 trillion US dollars last weekend:

"I do not see how the rescue package (approved Thursday) can succeed over the next three years without a very large drop in the euro; and ongoing, unlimited, massive generosity on behalf of the ECB towards any Greek financial institution that may wish to borrow from it.

"I agree with European elites who often remind us that the euro has been as stable and strong as the deutschemark. But to help solve this crisis, it actually needs to be as weak as the drachma."

He summed up: "Effectively, all that's happening to Greece is the sovereign equivalent of 'extend and pretend.'" That's a practice banks use to rewrite and lengthen loans rather than admit borrowers can't pay them back.

Heavier rain in Spain

Meanwhile, as dramatic as the financial situation in Greece has been, the Lord of the Dark Matter wondered whether that's just a distraction from the real problem, which, to his mind, is Spain. Given the size of the bailout needed to patch up Greece -- about $140 billion -- he noted: "The EU (European Union) cannot afford anything going majorly wrong in the Iberian Peninsula. Too big to fail is one thing; too big to bail is another."

If that much was required to help a country constituting roughly 2% of the euro community -- virtually a rounding error, as I pointed out early in this crisis -- it would take a heck of a lot more money to rescue Portugal, Spain and/or Italy if any of those countries got into the same trouble.

No news is bad news in the US

Moving westward here: My daily column on my own website (subscription required) ran with this headline April 30: "Market Weak Because It Was!" Given the absence of any news to rattle stocks, I described the day and its 225-point drop in the Dow industrials ($INDU) as "an interesting departure from the recent past, when almost nothing was capable of turning the market red."

The next Monday, with the market firing right back up, I felt a little silly for having made that point -- until the next day, when serious weakness set in again.

Continued: Are we seeing a failing rally?

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