I woke up from a Euro Nightmare Twice Today

1. We reached a tipping point this past week when the scam balls of Washington wasted a crisis and failed to make a change anyone could believe in. It was a week where the President of glamore showed moral fecklessness and the Congressmen voted to try to delay and obfuscate the day of reckoning.

2. But the day of reckoning came. The tiny notch down from AAA to AA+ is not meaningless, or an empty symbol which governments or markets can ignore. The very act of downgrading is a REFLECTION of the UNRELIABILITY of the US government. Sadly, the notch down is saying, "Whatever you assert you are going to do is simply not sufficient to make us believe that you will be able to meet your future financial obligations in time and fully." Just like the Greek, Irish, Portuguese, Italian, Spanish government authorities, YOUR WORD IS NO LONGER YOUR BOND.

3. The big implication of this tilt against the EMPIRE is that every other country is now IMMEDIATELY SUSCEPTIBLE to downgrading. High on this list is France. And it looks like the European Financial Stabilty Fund (EFSF) with its guarantees totalling up to €450 bn is simply not enough to save either Spain or Italy. The EFSF also implies that Germany would be the last country-bank holding the can. Spun positively, this means Germany could successfully colonise the weaker and weakened European countries. So, the "objective logic" of the EFSF, will be tested continuously over the next week until the costs of borrowing are so great that the country simply locks itself out of the capital markets. I don't think this is an intentional strategy or policy of Germany; it just so happens, they end up with all the chips in this round-robin series.

4. WORST CASE SCENARIO. Saturday night, August 6th, the presidents and finance ministers of 20 European countries telephone each other from their holiday homes and confirm their commitment to save the EURO (ha!) next week. Asia opens limit down on rumours that vast European banks cannot and will not be able to tap the bond markets; Italy confirms it will continue to refrain from issuing government debt; Spain does the same; and then, someone says "Remember the Greeks have a hard payment coming up and they have no money." The ministers and the EFSF on Sunday confirm their willingness to open a window to secondary and seasoned asset-backed paper and exchange therefor their own Euros. For a split second, everyone is in absolute suspense, and then, despite the S&P downgrade of the US long bond, every bank in Europe that can places orders for US treasuries and UK gilts. Rumours swirl around banks well-known for their exposure to Greek debt or that their portfolios replicate a portfolio of European sovereigns (Intessa, Unicredit) so in effect, such banks are cheap synthetic CDOs of EURO risk and the CDS spreads of local 10-year government bond over German 10-year climb above 6.5 and then touch the magic lift off of 7%. THEN PANIC REIGNS. BUT THERE ARE NO CIRCUIT BREAKERS FOR TRADING GOVERNMENT DEBT! In sum, the worst case scenario next week for Europe is a full-blown destruction of the EURO.

5. This could not happen, right? It's about as improbable as the US losing its AAA rating. That's just not even conceivable in real life... And then I woke up.