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Final Countdown for Greece?

Central bank liquidity moves last week are a clear signal that Europe is about to let Greece default...

WHY HAVE more people not seen the Greek default coming? asks Dan Denning, editor of the Daily Reckoning Australia.

Part of the investor confusion stems from the big news late last week. The heads of five organized financial crime families – the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank – announced they would offer three-month loans in US Dollars to pretty much any European bank that needed it.

This was a liquidity move to give European banks Dollars. They need those Dollars to repay previous Dollar-denominated loans and to make new ones. Trouble is, US money market funds, with over $700 billion in cash, have stopped lending Europe short-term money. So the Fed stepped in to the rescue.

This was how the story played out in the press. But you could make a good argument that flooding Europe's banks with Dollars (or the guarantee of Dollars if needed) was a clear signal that Europe is ready to let Greece default. It's almost certain to happen now, and maybe as soon as this week.

It probably should have happened sooner. But the European Central Bank (ECB) needed time to make sure the biggest French and German banks would not be wiped out by losses on Greek government bonds. And now, the whole system has ample Dollar supplies on hand for any emergency capitalizations made necessary by Greece's default.

You can tell how unstable a system is by how long its periods of equilibrium last. The Five Families news last week was good for 24 hours of higher stock prices. But our view is that this was just covering fire for anyone in-the-know to sell stocks before the crisis was stage-managed to the next phase.

The next phase is the ECB, the European Union, and the International Monetary Fund making demands of Greece that will result in the failure of the Greek government and/or Greece saying "enough!" The triumvirate of monetary dictators from Europe have threatened to withhold the next disbursement of Greece's bailout fund unless the government fires at least 25,000 public servants and collects more taxes.

Greece should probably do both. But it certainly won't. And the demands being made of it now serve only three real purposes. First, the ruling German coalition can tell German voters it got tough with Greece. Second, the ruling Greek coalition can tell Greek voters it got tough with voters. Third, Greece can be allowed to default and leave the Euro in a way that doesn't cause more panic in other government bond markets. At least not yet.

Our analysis could be wrong. But the nature of all the moves in the last four days has been to ensure adequate liquidity in credit markets. Greece's fundamental insolvency hasn't changed. Europe isn't trying to fix what's broke. It's trying to break off the most broken parts in order to avoid collapsing the whole project.

We'll see how that goes. In the meantime, any "surprise" Greek bankruptcy is going to catch stock market investors flat footed. But the bankers and policy makers are not worried about share market values at the moment. They're worried about saving their Byzantine, debt-backed, hopelessly complex financial system.

Precious metals are bouncing up and down. As fearful as investors are, they know that intervention by the powers-that-be usually hits gold and silver the hardest. The Fed meets this week. Its interventions – buying long-term bonds, buying other assets, introducing new maturities – destabilize markets because they make long-term planning dangerous.

But it is what it is. We have to live (for now) with the Fed and the ECB and their dogged determination to persist living in an alternative monetary reality. To be sure, the markets have already spoken about Europe's financial and monetary reality. Greek default is almost 100% certain according to credit default swap markets. And the fact that US money market funds won't lend to European banks at the moment is another market reality.

Yet Europe and the Fed keep doubling down on the basic premise that more debt is the solution to a solvency problem. We reckon they have two more chances to recapture the confidence of the market. If they don't, they will have to borrow money from China and post central bank gold as collateral.

Or the monetary system is in for more shocks between now and the end of 2011. One of them is bound to be fatal. If we were a betting man, we'd bet that the Euro is going to monetary Hell. And "risk assets" are going to be collateral damage. 

Whatever you do, don't get caught believing the theatrics. Have your own financial survival strategy. And stick with it.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

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Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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