James Saft

James Saft is a Reuters columnist. The opinions expressed are his own.

A financial advisor who counsels 57-year-olds to lock themselves into large loan payments until they are approaching 90 probably ought to be looking for another line of work.

And yet here we have Ben Bernanke, perhaps the most powerful man in the global economy, following exactly that course. The Federal Reserve Chairman is putting his own assets on the line to walk that reflationary walk in a move that tells you a lot about the theory, practice, risk and rewards of the economic remedies he champions.

Bernanke, who turned 58 this week, refinanced his mortgage in September, less than two years after the last time he refinanced, according to a report in the Wall Street Journal, citing sources and public records.

Bernanke owes $672,000 on his house, about 80 percent of its appraised value. The mortgage has a 30-year term, implying that repayments are fixed and that it likely carries an interest rate of about 4 percent.

The most recent refinancing came not long after Bernanke launched Operation Twist, a Fed bond buying program partly intended to drive down mortgage rates and thus hopefully stimulate the economy.

To be clear, I see no conflict of interest in Bernanke refinancing his mortgage, and his actions are entirely consistent with the way you would expect someone who has pursued his monetary policy to behave. He’s within his rights to refinance, and indeed refinancings like his are one of the most important channels through which monetary policy can stimulate the economy.

That said, what we have here is a man who was approaching 58 saddling himself with a debt that will have to be paid down over 30 years, at the end of which time he will be a hopefully sturdy 87-year-old.

That is not the way in which mortgages were originally intended to be used. In the now quaint days of the 1950s and 60s, people actually took out mortgages with the idea that some day they would retire them as opposed to using them as a sort of permanent source of leverage. Typically borrowers would time their mortgages so that it would be retired shortly before they did, thus leaving them better able to cope with reduced retirement income.

In fact, the Chairman is not too far off the age at which you’d expect him to be taking out a reverse mortgage, one which pays out monthly in exchange for a lump sum repayment on death.

POLICY MADE MANIFEST

An important thing to note is that repeated refinancings bring with them more risk to the borrower because every time you refinance your mortgage into a fresh loan you extend the term over which you will repay the loan, getting ever further away from repaying in full. This is especially true with 30-year loans, where the bulk of the payments in early years are simply debt service rather than repayment.

So here we have U.S. monetary policy made manifest: keep borrowing and let the future look after itself. It’s absolutely true that mortgage refinancings at lower rates – and U.S. 30-year rates have dropped to below 4 percent from 6 percent in 2007 – help to stimulate the economy. It’s also true that those debts must eventually be repaid, though if monetary policy is aggressive enough that repayment will be in dollars that are worth less.

It’s also fair to note that Bernanke is not your typical guy pushing 60. While he makes a good salary of about $200,000 as Fed Chairman, his earnings parabola will not follow the usual course. As Alan Greenspan has amply demonstrated, the late-in-life post-government-service income of former Federal Reserve chairmen is a fair bit higher than that of the average 58-year-old. In this way it may just be a clever example of shifting consumption forward, while not taking undue risk.

That may be true for well paid professionals in finance but the risks for the rest of us have obviously risen. The world we live in, in which housing and the means to finance it are used in essentially speculative ways, is one with far more risks and inherent instability. Housing tends to get ever more expensive, and people tend to take ever greater risks to obtain it, taking a personal and global toll.

Bernanke did not create this world, but his policies helped to foster its growth. It’s unclear if or how the U.S. goes back to being a place where your typical 60-year-old is coming close to having paid off her house, but we can be sure that the forces that might make that happen will be opposed by almost everyone making economic policy now.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

James Saft is a Reuters columnist. The opinions expressed are his own.

Europe‘s rule-based approach to fiscal reform will fall short because it effectively ignores the dynamics of credit markets, which laid the tracks along which this train wreck traveled.

Europe moved last week to impose some discipline on its member states’ fiscal houses, choosing a rule-based fudge rather than the fiscal union that a common currency probably ultimately needs. It will thus take discretion away from member states, pre-committing them to austerity measures during tough times, while doing very little to address the malfunctions in the banking system which create destructive credit bubbles in the first place.

Reforming Europe‘s fiscal framework without addressing the financial system which created all of the credit is like having alcoholics take ever more severe pledges of sobriety and penalties but still allowing them to own cocktail lounges.

To be sure, some sort of reform is welcome. The past decade has provided ample evidence that the previous framework was easy to game for states without sufficient discipline.

That said, while the shambolic arrangements of the euro zone have hamstrung attempts to react to the crisis, the means by which euro zone states got themselves into trouble are varied.

There is, however, one common denominator – a credit bubble was a necessary precondition to the borrowing which now leaves various European sovereign borrowers suspect.

This is as true of Ireland as it is of Greece. It is also true of France and may someday be true of Germany, if the current stream of policy thought is brought to its logical conclusion.

Ireland suffered a collapse in sovereign credit-worthiness because its banks engaged in a Ponzi-fest of lending, both to their domestic clients and to borrowers abroad. Ireland was brought low by assuming, effectively, the credit risk for Irish banks, while a policy of austerity has combined with the natural fallout of a credit bust to crater tax receipts, further undermining the state’s ability to service its debts.

Something not too dissimilar happened in Spain with housing-related credit but not on the same scale and, so far, without an outright banking crisis. There too a credit bubble floated the economy, flattered tax receipts and put off the reckoning Spain is now undergoing.

Greece too fattened at the trough of the credit bubble, using easy global credit to allow it to finance profligate government spending, despite endemic tax fraud and corruption. You have to note here too that if a state fabricates its economic statistics no number of new rules or treaty revisions will work. Greece‘s problem wasn’t simply that it could borrow at German-like rates while being an old-fashioned emerging market, it was that it was doing so in the midst of probably the biggest global credit bubble ever.

AND ON TO FRANCE

And then we come to France, and its banks. Investors are now demanding more than a percent extra in interest to hold French bonds compared to German ones, in large part because France is the obvious bag-holder should its horrifically over-leveraged banks come undone. And yes, those banks have created credit and bestowed some of it on France itself, and much of it on doubtful borrowers further south, thus piling leverage upon leverage.

This seems to be a real blind spot in European – really in global – policy making. It is instructive to note that the European Central Bank has focused most of its ire on sovereign borrowers, which it refuses to coddle with direct purchases of government debt, while at the same time taking ever more extreme steps to keep banks alive with generous financing.

Last week the ECB came out with a host of liquidity provisions aimed at banks, including new long-term funding options, a relaxing of collateral rules and allowing national central banks to finance certain bank loans. Of course some of this liquidity will simply find its way back into sovereign debt, or at least many European states must hope so.

As far as Europe‘s reform of its banks goes, most of the effort is expended on making banks solvent, without effective measures to short-circuit the next credit bubble. That bubble will only happen after an almighty credit bust, which is now on its way as banks pull back from lending and seek to dispose of assets.

Looking through the coming recession and credit crunch, the excessive co-dependence of states and their banking systems looks likely to continue. There are no convincing measures under discussion in either Europe or the U.S. to break the too-big-to-fail guarantees, and so long as financial institutions are run for private profit while benefiting from a public guarantee the risk is the formation of another credit bubble.

Maybe next time it won’t be excessive government borrowing. It doesn’t need to be. The financial system will create the money, and governments will foot the bill for the instability that ultimately follows.

States must break the state/bank co-dependency or ultimately the banks will, perhaps literally, break the states.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

James Saft is a Reuters columnist. The opinions expressed are his own.

How do you save an economy during a debt bust without mass defaults or a lost decade?

From the evidence thus far the answer is: you don’t.

Both Europe and the U.S. have bent over backwards in trying to deal with excess private and public debts without default, hoping to keep the circus floating along for long enough so that they can be rescued by growth and inflation.

In the U.S. that has meant rescuing the banks while using various types of new leverage to try to keep housing and securities prices above the level where banks carry them. In Europe, quixotically, this has included both cutting back on public expenditure while at the same time refusing to recognize a 50 percent writedown on Greek debt. It has also meant keeping banks and countries on life support via loans or debt purchases from the European Central Bank.

If you want to know how well temporizing works while dealing with a mass repayment of debt, you only need to look at Japan, the original victim of a self-inflicted lost decade of scant growth. There, too, bad companies and banks were kept alive, and calls for fiscal sobriety without debt restructuring produced lousy results. The hallmarks were very little growth and a tendency to lurch back into recession.

So why this fear of extinguishing debt? In part it is because a default or jubilee makes plain who is getting gored, unlike a soft default through inflation. It is not easy, politically or practically, to press reset on an over-leveraged financial system. And in Europe the losers in a mass default would be concentrated in the north, whose banks and countries would be hit, while the private and public borrowers of the south would tend to benefit.

It is also made worse by the fact that the dominant strain of conventional economics fails to take account of the key role that both debt and instability play in capitalist economies. In this view because one man’s debt is another woman’s wealth, the debt itself is held not to matter. This is based on a naive model under which debt is created by savers lending their money to borrowers.

That’s not how it works in the real world, where banks in essence create money when they choose to make loans, only later looking for the reserves to backstop the deal. Nor does it reflect the way in which the shadow banking world of securitization and investment leverage creates money and drives prices and economic growth.

WRONG SIDE OF THE SLOPE

With private creditors having reached saturation and now seeking to repay debts, we now find ourselves on the downside of a slope where simply supplying easy terms to banks fails to stimulate borrowing or growth. Add to this the folly of the European bank recapitalization programme, and very possibly a similar one to come in the U.S. This will only force many banks to all sell loans and other assets at the same time, depressing prices and making credit for those who can’t tap a friendly central bank much harder to get.

“The way you get out of a debt-induced crisis is by abolishing debt that never should have been extended in the first place,” Steve Keen, an iconoclastic Australian economist said in a talk with the Institute for New Economic Thinking.

“You can do it in the slow grinding way of bankruptcy, or you can do it rapidly with a debt moratorium. The financial sector fundamentally has the responsibility for creating that debt — it should never have been extended in the first place. If we continue honoring that debt which was dishonorably extended, we face an incredibly long period of slowly reducing that debt in the grinding ways we allow.”

Keen is in favor of a kind of a modified debt jubilee, under which all individuals are given money and those with debt are forced to use it to pay it down. This type of debt monetization could also theoretically be applied to sovereign debt, though this is not part of Keen’s plan.

Of course just printing money by itself does nothing to prevent another bubble forming, in fact it could create an incentive for people to take on too much debt in hopes of being bailed out by the next jubilee.

For that, you’d need strong controls on the financial system to prevent it from supplying excess leverage. That actually might help to control excess borrowing by states, as the risk-blind way in which the banking system treats sovereign debt is a prime cause of our current state.

A controlled debt jubilee beats the other two likely alternatives; a market-imposed borrowing freeze with a currency crisis or years of Japanese-style misery.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

James Saft is a Reuters columnist. The opinions expressed are his own.

Call it the Merkozy Plan – there shall be no more losses.

German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled on Monday yet another final plan to save the euro, this time calling for new treaty provisions to ensure members maintain fiscal discipline as well as an all-too-predictable move to hold monthly meetings of EU heads, seemingly an attempt to revive Europe by providing business for its caterers.

Perhaps most importantly, the two agreed to scrap a previous agreement to make private sector creditors share in the losses in all future bailouts. Bondholders still face a 50 percent write-down on their holdings of Greek debt, but that’s it, from here on out it’s all going to come out of the hide of taxpayers.

Of course there is the (slim) possibility that future bailouts will include burden sharing by banks and others who hold European government bonds, but given how poorly it was received this time it is best not to hold your breath. The policy U-turn is wise, reckless and deeply depressing all at the same time.

Wise because there is a direct line of causation between the imposed Greek writedown and the subsequent massive sell-off in Italian bonds. Investors are capable of imagining the future, and in the future they saw no guarantee for toxic Italian bonds (as well as others).

“It was a terrible mistake,” European Central Bank Governing Council member Athanasios Orphanides said on Monday. “By forcing the impairment of any state bond we have triggered concern internationally of all state bonds in the euro zone and that’s one of the key reasons we have a problem,” the Cypriot central banker said.

Those sales of bonds by frightened creditors threatened to make failure by Italy a self-fulfilling phenomenon, as the higher the interest rate went the less solvent Italy became. With the rot spreading into Belgian and French bond markets and with some German bonds trading at levels that only make sense if investors expect to be re-denominated in new deutschmarks, a change in policy is inevitable.

Once abroad though, this idea of private sector participation in bond losses, which is of course basic to a market-based system, is tough to extinguish. If the International Monetary Fund becomes the vehicle for funding the bailout it will want to be the senior creditor. It would be as difficult for Barack Obama to explain to his taxpayers why they are spending money to make investors whole as it will be for Angela Merkel to tell hers.

Perhaps the ECB will be willing to fund a bailout while remaining on par with investors, but then again, perhaps it will want to be recapitalized in advance too.

SOMEONE HAS TO PAY

The move is reckless because in pinning all of the costs of the bailout on the public purse, which is the only possible source of funding now, Sarkozy and Merkel have managed only to underline exactly how vulnerable Europe‘s finances are.

Standard & Poor’s will warn all 17 euro zone nations they risk a downgrade in the next three months, according to reports. This makes perfect sense, as a move to absolve private sector creditors from their share in losses only increases the burden on those better-rated countries which will now bear more of the losses, something that ultimately may harm those weaker countries they backstop.

It is also reckless because the U-turn only further institutionalizes the tacit policy that banks will not be made to absorb the consequences of their actions. While it is good that Europe is taking steps to force countries not to borrow excessively, the banking system they have created and backstop will find other reckless loans to make. A bond market without losses is nonsense. The next crisis starts here.

Finally, this is deeply depressing because we are faced with two likely alternatives; a cataclysmic fracturing of the euro or insufficiently democratic policy-making. Given German, Austrian and Finnish distaste at the prospect of bailouts – of investors and countries – it seems unlikely that the proposed treaty changes will be put to a popular vote everywhere. Given that the new treaty changes imply a real loss of sovereignty for those who go along, this is quite a bit short of the sort of thing that ought to happen in a full, participatory democracy.

Then again, having hitched the euro’s fortunes to this particular engine, a “no” vote on the proposals could easily bring on a disorderly disintegration of the euro zone, which would be a very bad outcome.

It’s hard to be in favor of bailing out feckless investors, even harder to countenance major changes in government without sufficient public participation. It’s harder, perhaps, at this point to devise an alternative.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

James Saft is a Reuters columnist. The opinions expressed are his own.

To judge by equity markets, central banks have all the credibility in the world, but their reputation just may exceed their actual power.

Markets rallied furiously on Wednesday after six leading central banks acted to give banks access to easy money, a coordinated bid to unblock funding markets which threatened to seize up due to fears over European debts.

The group — the Federal Reserve, the European Central Bank and the central banks of Japan, Britain, Canada and Switzerland — agreed to offer dollar swap lines at a half a percent less interest than previously and pledged to keep these lines in place until early 2013.

In some ways the jubilant market reaction makes sense, though we should be careful about concluding that the outcome of the European crisis has improved by 4 percent simply because shares went up by about that much. Over the long term, central banks have a very hard time affecting the value of anything, though they are excellent at changing the price of things.

What the moves — which are similar to steps taken in 2008 after the collapse of Lehman Brothers — do accomplish is to lessen the chances that a bank gets caught short and collapses because it can’t access dollar funding. The very understandable unwillingness of U.S. banks and money market funds to provide dollars to European banks, many of which are full to the gills with now doubtful European government bonds, had raised this as a real possibility, and a move to mitigate that is welcome. The very existence of the central bank backstop will somewhat ease funding markets, though the days of money market funds lending money cheaply to European banks may well have ended.

What the moves are not is sufficient in and of themselves to resolve the crisis and remove the risk to the global economy. Central banks are intended to provide liquidity to solvent institutions so that they do not get brought down by short-term market crunches. At the extreme edges of central bank actions — and that is where we find ourselves, that distinction between solvent and insolvent actually ceases to matter.

After all an “insolvent” bank with an unlimited (in time and size) liquidity line is, in the long term, solvent once again. What that bank is unable to do, unfortunately, is play its role as an inter-mediator of capital, making loans and priming economic growth.

THE LONG CREDIT CRUNCH

So, in lessening the chances of a self-fulfilling crisis, the central banks are to be praised.

The rest of the account ledger is a lot less encouraging. One of the principal global threats coming out of the European situation is the possibility of a new credit crunch, something that is arguably already taking place in Europe. European banks need to recapitalize to protect themselves from losses they have and will suffer on euro zone government debt, as well as on losses yet to come from corporate and consumer loans in the region.

That recapitalization still has to happen and until it does, economic growth, globally but especially in the euro zone, will be slowed. The experience of Japan shows clearly that keeping zombie banks alive only extends the pain out over a longer period, and very possibly makes things worse by cutting off the opportunities of new and fitter banks and businesses which won’t get funding because we pour our resources into the banks and businesses we already have.

And of course the move does nothing to solve the thicket of problems facing the euro zone. Europe still needs to come to some understanding about how it is going to proceed and knit itself more tightly together through a fiscal union, or how it will extricate itself from its current mutual death grip.

That really comes down to what Germany and the ECB do. To preserve the union as it stands, Germany is probably going to have to sign on for several years of chunky transfers southward. Unlike the banking crisis, there is really no way to do this with smoke and mirrors, the flow of funds is going to require more than a pledge.

Secondly the ECB has to become far more aggressive and far less stiff necked, all at the same time, perhaps an impossible task given its history and bylaws. That means more rate cuts, of course, as their decision to hike in the spring must be one of the largest mistakes in recent financial history, but also somehow make available funds, perhaps to the EFSF or IMF, that somehow are used to purchase bonds directly from Italy and whoever needs money next.

It’s a tall order.

The central banks have bought time, but at a certain point the meter won’t take any more coins, even freshly minted ones.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article.)

James Saft is a Reuters columnist. The opinions expressed are his own.

A sharp cut back in lending by euro zone banks in their scramble to raise capital will prove an important channel spreading pain from the vulnerable single currency area to the rest of the world.

Though the euro-induced credit crunch will be less important than the outright effects of the euro zone recession, in some areas, like trade finance, and in some regions, such as emerging Europe, the impact will be felt far more quickly.

“European banks have huge exposures outside Europe itself,” said Srinivas Thiruvadanthai, an economist at the Jerome Levy Forecasting Center.

“They are being asked to increase their capital base. You can go and raise capital or you go and get a government handout or you shed assets. Raising assets will be very, very tough.”

Euro zone banks will be cutting back on foreign exposure, either out of prudence or under pressure from their regulators.

Austria this week imposed restrictions on its leading banks, including Raiffeisen, Erste Group Bank and Bank Austria in central and eastern Europe, requiring them to make new loans of no more than to 1.1 times the deposits and wholesale funding raised locally.

Romania could see a deleveraging equal to 1.6 percent of GDP, while the Czech Republic, Hungary and Turkey all face hits of about a half a percent of annual output, according to data from Nomura International.

It won’t stop in Europe. About 20 percent of bank assets in Chile, Uruguay and Mexico are controlled by euro area banks.

Less lending by international banks will drive the overall cost of credit up, almost certainly working against official policy which will be trying to reduce rates.

In some areas, like trade finance where some European lenders are prominent, this impact may be felt rapidly, as it was in 2008 when fear of counterparty risk prompted many banks to pull out of trade financing for a time. That had a magnifying impact on the global downturn, as some exports were delayed despite their being willing buyers and sellers at a given price, simply because the letters of credit needed to facilitate the deals fell through.

This will only be intensified by European bank recapitalization proposals, which impose a tight deadline of next June for 70 euro zone banks to find about 100 billion in new capital. And remember, that amount of capital, huge as it is, may prove insufficient given the recent free fall in the value of euro zone sovereign debt, to which euro zone banks have critically high exposure.

BANKS FOR SALE

Given the difficulty in raising capital directly from investors, euro zone banks are looking to sell whatever they can that will fetch a reasonable price.

Since investors, and their peers, don’t want to buy more European exposure, that means selling off bits and pieces of financial institutions outside the euro zone.

Spanish bank Santander, seeking to boost its core capital to 10 percent by June, said this week it will sell a 7.8 percent stake in Santander Chile, worth around $1 billion dollars.

That deal sent shares of the Chilean affiliate down sharply, increasing the dampening impact on bank valuations there, and ultimately on credit availability.

While the impact in Asia, where continental European banks hold just 5.0 percent of their assets, will be less, it will still be felt, especially in areas already being hit hard, like Hong Kong property development, according to analysts at Barclays Capital.

And the great banking recapitalization of 2012 likely won’t be limited to Europe, as shown by the Federal Reserve’s newly announced stress test of US banks.

Austria‘s move to restrict lending abroad has to be viewed as a kind of economic protectionism, a sort of reverse tariff, but this time on precious bank capital. That sets an extremely risky precedent, but one it is easy to see other euro zone nations following.

If Germany fears the costs of recapitalizing its banks in the event of a euro zone break up, as well it should, a logical step would be for it to try and conserve its national banking resources via similar moves.

That same logic holds, even more chillingly, for countries outside the euro zone. Tight credit, and tight controls on credit, may end up being a leading story of 2012.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

James Saft is a Reuters columnist. The opinions expressed are his own.

It looks as if we will need to see some kind of miracle intervention from the European Central Bank — a Deus ex ECB — or the euro zone is heading for a nasty divorce.

Either the ECB comes across with a mandate-busting rescue, probably involving direct lending to Italy and rolling the currency printing presses, or the forces aligned against currency union will roll over Italy and into France.

Italian political chaos and a move by some clearing houses to demand more margin on Italian debt helped to drive 10-year yields of the troubled sovereign borrower to a euro-era record of 7.5 percent on Wednesday. The market appears to doubt that the EFSF rescue fund will be big enough and operative enough to back Italy effectively.

The sheer size of what would be required to backstop Italy, which has the world’s third-largest bond market, throws doubt in turn on support for Spain, whose bonds are also selling off, and the ability of France to maintain its AAA rating, without which Germany is left alone as the bulwark against a gigantic bank run.

The ECB has been buying Italian bonds in the secondary market but still sees itself as only providing transitional support until other European rescue initiatives can take its place.

There is no time for that, and the ECB, and the nations which ultimately govern it, must decide if they are going to stick to their stated principles or preserve the euro.

“What is needed is a clear statement from the ECB that it would act as the lender of last resort for a sovereign that meets explicit and tough conditions and can thus safely be deemed to be solvent,” Holger Schmieding, economist at Berenberg Bank wrote in a note to clients.

“We still believe that the ECB would step in to save the euro and itself in the end, and that the Bundesbank may even acquiesce to that once all other alternatives to keep the euro together have been exhausted.”

To save the euro the ECB must declare that it will act as a lender of last resort for euro zone sovereigns, wade into primary bond markets in huge size, effectively monetizing government debt by printing money to fund borrowing. To work, this has to be accompanied by believable pledges not just of economic reform, but to bring on fiscal integration and to change forever the role of the ECB.

Doesn’t sound very likely, does it, especially in the next week or two.

A SMALL MATTER OF THE LAW

Not only is this anathema to many within the ECB, it is expressly against the treaty which describe what it may and may not do. Article 101 of the European Treaty expressly forbids the ECB from lending to governments and Article 103 prohibits the euro zone from becoming liable for the debts of member states. That means that either the ECB has to in essence go rogue, violating its founding principles, or the mechanisms of structural change have to pull off a miracle in the next week to change its mandate.

The amount of debt the ECB would take on to its balance sheet might also eventually require a recapitalization of the central bank itself, no small matter.

If that all somehow comes to pass, then the rest of ailing Europe, seeing how Italy was bailed out solely because it is big, will immediately try to reopen the terms of their own bailouts. Not to mention the fact that these actions would almost certainly face enormous political and legal challenges in Germany and elsewhere.

Not only does this all seem far-fetched, it is far from clear that it is a good idea. As soon as the ECB starts printing money the euro will tumble, and the Federal Reserve will be under pressure to engage in its own round of quantitative easing to counter the drag on its own economy that a newly strong dollar represents, raising the specter of hot currency wars.

One alternative is an IMF-led bailout of Italy, perhaps supported by some cash from the EFSF. This too may be too big a task for the IMF to garner sufficient support from its own funders. Imagine the election year challenge the Obama administration would face in explaining why it provided hundreds of millions in support to Europe via the IMF.

The other choices are equally unpalatable. Simply letting Greece go, which might have worked several months ago, is now not enough. The consequences to the global banking system and economy if Italy and perhaps others left at the same time are mind-boggling.

Why equities have traded as well as they have given these risks is a mystery. Perhaps massive money printing will be good for riskier assets; a euro break-up surely will not.

One way or another, it is looking as if we are going to find out.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)