STOCK MARKET WATCH, Monday, December 12, 2011

[Ghost Dog]

100. Euro Summit Failure Underscores Need for Sovereign Default

OANDA Corporation Mon, Dec 12 2011, 22:30 GMT

...The main outcome of the weekend meeting was the establishment of another fund, this time to be administered by the International Monetary Fund. Eurozone central banks will provide 200 billion euros to the IMF which is also expected to make available another 300 billion euros.

This new fund will be in addition to the existing European Financial Stability Fund. The EFSF currently contains about 500 billion euros but much of it is already committed to existing bailout plans. This leaves the EFSF woefully underfunded to save the larger economies now teetering towards insolvency.

The fact that eurozone officials continue to print money in anticipation of another round of bailouts makes it clear that the problem is still being perceived as a liquidity issue. The reality, however, it that the lack of liquidity is the result of a debt problem and a corresponding lack of confidence. Investors are unwilling to buy Greek debt at a rate Greece can afford; and until confidence is restored, Greece and a handful of other countries following Greece’s path will continue to rely on bailouts to cover their deficits.

The only way to break this dependency is to invoke a reset. These countries must be forced into a controlled default that involves a writing-down of sovereign debt. The cash now being set aside would be better served to minimize the impact a write-down would have on debt holders including the banks forced to accept a reduced payout. To simply hand billions of euros over to these countries may deal with the symptoms, but does nothing to address the ailment.

/... http://www.fxstreet.com/fundamental/analysis-reports/market-pulse-fx/2011/12/12/