The World Needs a Better Band-Aid for Europe

Posted: Oct 29, 2011 12:01 AM

For the squeamish, it may be advantageous to move onto the next column because my analysis of the European debt deal is fairly graphic. 

In other words, proceed at your own risk.  

Imagine if you scratched your knee on a rusty nail.  

It wasn’t a large scratch but it was enough to draw blood.  

Normally, you would clean the wound with disinfectant and apply a bandage; the proper way to take care of the problem.  

However, suppose you only put a band-aid on the wound, just large enough to cover the scratch.  More than likely, within a few days, you would notice an ache and maybe even a pain in your knee, and most definitely a redness expanding beyond that band-aid.  Imagine, also, if each time the redness expanded beyond the covering, you simply tore off the old band-aid and replaced it with an even larger one.  

Of course, you’d never look at what was happening below the surface but you certainly could feel it.  

Ultimately, the pain would become unbearable, and in all likelihood, you would lose your ability to walk. 

At that point, there would also be a strong possibility of infection developing to such an extent that gangrene sets in, and you may need the leg amputated. 

Can you picture that?  Of course you can.  

But you can also imagine how stupid a person was for not addressing the problem when it first happened. 

How absurd, you’d think, to just replace one band-aid with another and not address the problem. 

Welcome to the European version of the bigger band-aid. 

The same people who got Europe into this mess are the ones creating the ways to forestall the inevitable by trying to take on even more debt. 

Witness true market valuations (haircuts) becoming voluntary acceptances (or not).  Recapitalization based upon how the banks value their own assets, not being done by an independent third party. 

This is truly a case of mark-to-model on steroids. 

Add to that the belief that Greece will somehow roll out of its hole. So now we put a band-aid on Greece.  

What happens when Ireland, Portugal, Spain and Italy want the same deal?  

Does anyone really believe that we have a big enough band-aid to cover them all?  

Well, at least the European banks will be able to sell their U.S. stock assets at higher prices today than a month ago. 

I’m sure they can thank Ben Bernanke for that kind of Red Cross gesture. 

Unfortunately, however, like the scratched knee, the European solution doesn’t treat the problem, it only covers it. 

Similar to the scratched knee, there can only be one conclusion. 

Putting a bigger band-aid on the problem only postpones the inevitable.