Time to do some handicapping. What are the chances that the fatalists -- the Germans -- win out and are able to crunch the bond issuers and the bondholders of the sovereign states in the euro? What is the likelihood that they let junk be junk, that they accept the subprime nature of the debt that's been put out there and let the market decide ... which means default, because there is no natural buyer of this merchandise, just the ECB?
As recently as a month ago, it looked like a bailout was assured, orchestrated with printing presses run by the ECB and endorsed by Germany. That slipped to about 70% when the Italian bonds ticked at 7%; now the odds of a bailout have fallen to 60% after the Spanish auction failed so miserably yesterday. I arrive at those odds with the help of my friend and colleague Matt Horween, who has done some excellent analysis for this site about the state of the world and the precarious nature of things right now.
What are the options here? We have the bailout option just mentioned, which is one where tons of paper has to be printed to buy the bonds of these nations and take them out of circulation. That's just unpalatable to the Germans, because to empower the central bank with the ability to print money at will without taxation almost automatically leads to some sort of sinister inflation reminiscent of the Weimar inflation that brought on fascism in their country.
Then there's Door No. 2, which is an endless continuation of what we have: the ECB bidding underneath when bonds get to 7% and then disappearing when they feel that things have stabilized. This method is good as long as it is accompanied by capital raises by the banks and discipline by the countries, something that seems too hard for anyone to swallow. That makes it, ultimately, a failed option.
Finally there's a let-the-market-decide scenario, where the nations and the bondholders get crushed, bringing on a severe deflationary recession or even a depression, the price that the EU has to pay for the profligacy of so many of its members. The sainted euro is preserved but liquidity goes away and so does business. This is the option that increasingly is gaining adherents, and you can measure it by the strength of the dollar vs. the euro.
None of these options is palatable. Stockholders here have to hope for the first option, accept that the second option is occurring now and be ready for the final option, which will hurt stocks here severely (even though many will ultimately bounce back because they have little to do with Europe).
Under no circumstances can banks be owned. High-yielding stocks with good balance sheets will take hits under scenarios two and three but they are the best way to go.
So, we still have the odds of a bailout in our favor -- but without something soon, we can bet that the other so-called solutions will come to pass.