The Europeans need to make a decision soon.  It is time to deal with Greece, then the markets can decide how they will deal with the Greek banking system.  The baby-sitting and reality TV watching public is so wrapped up with a $2 billion trading loss at J.P. Morgan Chase & Co. (NYSE: JPM) that they are not focused on the right issues at all.

The most news out of Greece is that hundreds of millions of Euros have exited the Greek banking system on top of the Greek government not forming any coalition.  Maybe some of the cash exodus could be Greeks paying their bills and living off their cash, but some is definitely a flight of capital out of Greece to safer countries where the banks are not so dependent upon the fortunes of what would be a bankrupt nation without outside help. Is literally a few hundred million Euros the start of a run on the banks in Greece?  National Bank of Greece SA (NYSE: NBG) is down 6.5% at $1.73 in ADR trading in New York.  There is also a rather pathetic exchange traded product called the Global X FTSE Greece 20 ETF (AMEX: GREK).

Where the situation in Greece gets so interesting is that up until this year there was no exit strategy from the Euro.  The Europeans did not really have a way to boot any nation out of the Euro, and any Euro-member nation did not really have the means to exit the Euro.  Now all the politicians are saying that they want Greece to remain in the Euro and that they hope Greece stays in the Euro.  What they are really saying is that the mechanism to exit the Euro is coming into place, without really saying how it will work.

Greece is either going to leave the Euro or it is going to get booted from the Euro.  What happens after that is going to boil down to whether or not Greece can remain the isolated event or whether it merely acts as the first domino to fall.  Spain is a much larger issue, then it boils down to the wild cards of Spain and Ireland.  The Bank of Ireland (NYSE: IRE) is down only 1.4% at $4.92 and almost $1.00 above a 52-week low for its ADR; Banco Santander, S.A. (NYSE: STD) in Spain is at $5.80 on its ADR at a new 52-week low; and iShares MSCI Spain Index (AMEX: EWP) is down 2.6% at $23.59 also at a new 52-week low today.

The biggest issue, which is larger than all of the other PIIGS combined and then some, is Italy.  America has banks that are too big to fail.  Italy is simply too big to bail.  Moody’s just downgraded 26 major Italian banks and left the outlook as negative.  iShares MSCI Italy Index (AMEX: EWI) is down 3.4% at $10.51 at a new 52-week low.

What has changed in the last month is the French have gone backwards into socialism and have effectively voted out the prior austerity measures.  As financially conservative as the Dutch are, even The Netherlands reached an impasse on austerity and balancing a budget.  And now Merkel’s party suffered a regional election loss.

What sort of Euro break-up is coming is hard to know whether it is a partial break-up or just the PIIGS out of the Euro or just some of the PIIGS out of the Euro.  Either way, the path is set that the Euro is not going to have all of the same member states as it did in 2011.  If I was a betting money on Greece’s future, it would be Greece with a Drachma rather than Greece with a Euro.

Can any of the Greek banks survive a Greek exit from the Euro?  National Bank of Greece SA (NYSE: NBG) is one of the safer of the large Greek banks, yet this is less than a dime from hitting a new 52-week low on its ADRs in New York.

One thing that no one wants to admit is that the Euro was an economic version of World War III.  After all, isn’t the Euro now just a very watered down Deutsche Mark?  Also, don’t be shocked when S&P or Moody’s downgrades the banks or sovereign ratings in the lands of the PIIGS. That is assured to be the case.  The current story of the Euro is one which is not going to end in a pretty manner.

More misery to follow…

JON C. OGG

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