You have probably heard and read about some of the same rumors and stories about a second bailout heading the way of Greece.  The aim is to prevent a de facto default scenario where Greece would repay 50% or 80% of the face value of its sovereign debt.  The problem is that this is just another handout that kicks the can further down the road.  It is our understanding that there is a likely outcome that the IMF would not release a payment of more than 10 billion euros without some guarantees from the European Union or the European Central Bank.  Whether or not this acts as a true bailout is anyone’s guess.

What we do know is that the markets are cheering even on the hope of a bailout.  Austerity measures mean spending cuts, which means less money into the economy.  So whether you say it is dollar-positive or whether you say it is Euro-positive what matters the most for the markets is prosperity.

All you have to do is look at National Bank of Greece SA (NYSE: NBG).  Its earnings report last week was nothing more than noise.  Who cares about the first quarter when all the developments have taken place in the last 6 weeks?  We see that NBG shares are up more than 7% at $1.40 today after hitting a new 52-week and multi-year low last week of $1.27.

If Greece is going to be bailed out again, Spain and Portugal are likely next… If so, Spain’s top bank,Banco Santander, S.A. (NYSE: STD), is the winner. That is what the market’s vote is with shares up 3.8% at $11.85 against a 52-week range of $8.65 to $13.75.

What is interesting is that Ireland denied rumors that it needs another bailout.  The first bailout hasn’t even worked through the system yet.  The Bank of Ireland (NYSE: IRE) is down over 4% at $1.62 against a 52-week range of $1.38 to $5.31; Allied Irish Banks plc (NYSE: AIB) is up 1.4% at $2.788 against a 52-week range of $2.00 to $15.25. The reason that the mix is there in Ireland is that there are reports out that Bank of Ireland is considering an equity swap for debt, which dilutes existing shareholders and those holders have already been diluted massively.

Maybe Ireland should have said “We don’t need a new bailout, because we already got a new bailout!”

We are in for one interesting decade ahead.  Austerity measures are likely to be seen in many countries in the years ahead.  That means less money to slosh around the broad economy by a smaller number of employed workers.  The trick is finding a balance that won’t kill the economy.

Before getting too excited, there is a call by Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott.  LeBas has is advising clients to exit all exposure to banking institutions in Greece, Portugal, Ireland and Spain.  In short, kill the PIIGS banks.  He even recommends cutting exposure to hybrids and preferreds “from EU financials with heavy wholesale borrowings.”  Needless to say, he is not a pro-euro investor today.

As far as how painful this could be in the lands of the PIIGS and the euro, LeBas noted, “A Greek debt restructuring will certainly be painful for the global financial system, but how painful depends entirely on whether the political players broadly acknowledge the inevitability of the country’s default spiral.”

Call it how you want to call it, but it was the great bailouts in America that allowed the massive rally to take place rather than the systematic meltdown that some had anticipated.

JON C. OGG

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