Monday, Sept. 12, 2011 11:18 AM – Greece May Default

The increasing risk of default by Greece was talked about Friday in Germany and plans are being made for handling such a crisis. Opposition to continued bailouts continues to build since Greece has not met the terms for qualifying for new aid.

There is also talk of booting Greece out of the Eurozone, the group of 17 European nations who use the Euro as their currency.

Discussions are also continuing on how to make the Eurozone financially stronger. Currently, only the monetary policy is jointly done, that is, the control of interest rates and the supply of money. That is controlled by the European Central Bank.

Fiscal policy, that is, spending by the individual national governments, is not under common control. The Lisbon Treaty tried to enforce it by setting requirements for fiscal health in order to be a Eurozone member but most of the member countries have broken those in varying degrees during the current recession. In addition, other requirements have been set by the International Monetary Fund (IMF).

Getting fiscal spending under unified control would take a change in the Lisbon Treaty, the latest treaty under which the Eurozone operates. A change to the treaty must be ratified by the parliaments of all 27 countries in the European Union. That would take a long time and be rather uncertain. Because of that, dealing with the current crisis will have to be done under the current system. But, unified control is on its way, as is probably losing some countries, some on purpose, some not.

French banks would be most affected by a Greek default. Some French banks own Greek banks. All told, French bank exposure to Greece is $65 billion, according to the Wall St. Journal.

The problem is contagion. Borrowing rates for Italy and Spain are barely under control and that only because of heavy European Central Bank buying of their bonds.

This could really get messy. If it does, it will not be good for stock markets around the world. This really bears monitoring.

Risk to stocks is increasing. In the US, the S&P 500 index is barely above the lows of last week and 2% above the low of August 8. A break below the Sept 9 low would probably mean a break of the August 8 low and most likely heavy selling would ensue. I continue to lighten up on stocks and will lighten up more if the August 8 low of 1120 is broken.