The collapse of the European Union as we know it is picking up steam and the impact is destroying US stocks.
The problem stems from the unpleasant fact that Greek government debt is worthless, and no turnaround is in sight. No one, not even the European banks themselves, know just how much of this Greek government scrip is in the EU banking system. Greece is merely Patient Zero in a European, if not global financial Black Plague. Speculation is now focusing on a Greek default as soon as this weekend.
This crisis has been staring the world in the face for months, if not years. Breakout hasn't been alone in trying to bring this to investors' attention, particularly as the situation began escalating earlier this week. Everyone knew the day of reckoning for the EU would come; the question was simply when the uncertainty would really start hitting the global equity markets.
The new information exacerbating today's European and U.S. market sell-offs is the resignation of European Central Bank official Jeurgen Stark for "personal reasons," widely believed to be Mr. Stark's personal objection to an ECB balance sheet expansion through a bond purchase program.
For its part, Greece announced this afternoon that it "rejects the talk of default." In a different context, Greece's announcement is adorable; akin to your kids rejecting the idea of bedtime. Given what's stake, it seems Greece remains in tragic denial.
Now that the process of pricing in of Europe's economic reality is now in full swing, it's simply a matter of figuring out the size of this thing. In an effort to get a sense of the magnitude, I asked Rob Arnott, founder and CEO of Research Affiliates, if the toxic debt crisis in the EU could rival that of the 2008 U.S. financial meltdown.
"This is bigger than Lehman in terms of scale," Arnott told me. "You're looking at most of the largest banks in Europe, which on a mark-to-market basis, are insolvent."Read More »from European Crisis Slams Stocks as Investors Fear Greek Default