Major Investment Bank: "Greece Is Going Down, Germany Drafting Law For Orderly Insolvencies"...As Neil Hume at Alphaville reports, "Big IB to clients: "they have it all planned: they are going to sink the ship (greece). Merkel is now drafting law for orderly insolvencies, but they don't want anyone to make money out of it, hence the ban."" If this is true, it 's curtains for Europe. Shorting the Euro at this point is like shorting Lehman: you may see savage short covering squeezes but the end result is well known.
One could make the argument, as Jim Rogers has, that a Greek default makes the Euro a much more viable currency long term, despite some expected short term havoc. The reason being that the other Club Med states are forced to return to fiscal sanity, or end up kicked out of the Euro currency club. However, it is critical to watch how the cram downs at the banks are handled.
If the Germans simply play accounting gimmicks to postpone or hide the losses, confidence will continue to erode and the crisis will magnify. If they print their way out with the ECB buying the impaired bonds at par, say, that's likely to be inflationary despite their best (and misguided) efforts at sterilization. If you give a bank $100 and only claw back $90, it can still turn the $10 back into at least $100. And, if they do succeed at sterilization, it could end up with unintended deflationary consequences. Indeed, the kaleidoscope is turning again.
Quietly, the Fed Funds rate ticked up Monday from 0.20% to 0.21% Monday (as reported Tuesday morning) and stayed there Tuesday. Despite the seeming deflationary backdrop it's hinting at inflation, at least according to my read of the dynamics behind the Fed Funds market as partially explained here. It could very well be that real interest rates are beginning to rise. As a reminder, if the Fed Funds rate exceeds 0.25%, the interest rate on excess reserves (IOER), the Fed would be forced to raise the IOER (tighten) or open the money spigots again. It certainly prefers to do neither.