I don’t know how many times I have to say this, but I’m saying it again.

Greece and the Euro are finished. The math is impossible. There is no way on earth that this Second Bailout accomplishes anything worthy of note. The idea that this country will somehow return to economic growth within two years, based on an additional €130billion in bailouts is outright insane.

Remember, Greece already received €110 billion in bailout funds in 2010… and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011. Greece’s economy is only €227 billion, so the country failed to post any economic growth and in fact saw its economic collapse accelerate after receiving a bailout equal to 57% of its GDP!!!

And somehow another 130€ billion is going to get this country back to economic growth in two years’ time? Greece hasn’t experienced any growth in five years.

Again, this entire deal is just stupid. And all it’s done is alert Spain and Italy to the fact that handing over fiscal sovereignty and implementing austerity measures in exchange for bailouts is a waste of time.

As I wrote to clients several weeks ago:

Meanwhile, on the other side of EU equation, Spain and Italy must be watching what’s happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures.

Both countries have already had a small sampling of the austerity measure medicine. Spain recently implemented a meager 19€ billion in austerity measures while Italy passed 30€ billion in austerity measures in 2011… hardly a drop out of their respective 1.06€ trillion and 1.5€ trillion economies.

Yet, even these tiny moves resulted in protests and riots. One can only imagine what Spanish and Italian politicians are thinking as they witness the widespread civil unrest, country-wide strikes, and economic depression that have occurred in Greece as a result of that country’s full commitment to the EU’s austerity measure demands.

Spain’s official Debt to GDP is only 64%, but its private sector debt is at an astounding 227% of GDP. And the Spanish banking system is leveraged at 19 to 1 (worse than Greece).

Moreover, the country is already experiencing an economic Crisis with an unemployment rate of 20+% and an economy that has been contracting since mid-2011 (in fact Spain’s GDP just actually went negative in the first quarter of 2012)…

So… we must consider that it is highly likely the option of simply defaulting is being discussed at the highest levels of the Spanish and Italian government. Should either country decide that austerity measures don’t work and it’s simply easier to opt for a default, then we are heading into a Crisis that will make 2008 look like a joke.

Well, Spain just woke up and smelled the coffee:

Spain’s sovereign thunderclap and the end of Merkel’s Europe

As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).

Taking what he called a “sovereign decision”, he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).

In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.

With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100015432/spains-sovereign-thunderclap-and-the-end-of-merkels-europe/

So… if you still think the Greek PSI matters in any way, you’re not thinking past the next 24 hours. Spain has just told the EU to “shove it.” Having seen Greece enter a depression and get pushed around by Germany and France for two years, Spain’s just told the EU that it’s not going that route.

So… if Greece, whose economy is roughly the size of Massachusetts, nearly took down the European banking system… what do you think will happen when Spain decides to it doesn’t want to play ball and would rather just default.

Hint: It will be Lehman times ten.

On that note, if you’re looking for actionable advice on how to play this situation (and the markets in general) I suggest checking out my Private Wealth Advisory newsletter.

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Graham Summers

Chief Market Strategist