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Posted by on May 4, 2010 in Europe, Markets, TG Roundup

Now Spreading: Oil Spill in the Gulf and European Contagion

In 1997 the Asian debt crisis was termed by the western media as “Asian Contagion.” The implication being – it is some sort of a terrible communicable disease from Asia. In the interest of ‘fairness’ I am calling the current European debt crisis, “European Contagion.”

Zero Hedge reports:

Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats’ bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds. However, even with the bailout the Greek stock market is tumbling: the Athens Stock Exchange is now down 3.4% to just under 1,800. As we expected, the euro is about to breach 1.31 support. At that point, not even the US algos and the Liberty 33 traders will be able to prevent the contagion. And adding insult to injury is the latest rumor of an upcoming downgrade or very cautious language of Germany by the suddenly hyperactive rating agencies. When that occurs, you can kiss Europe goodbye.

Biggest CDS intraday movers (from CMA):

I don’t know what the ultimate damage from the spread of oil spill in the Gulf is going to be. But, I have a fairly good idea on the damage European contagion can do.

Big moves (relative to the last 6 months) in stock indices for the last few days is an indication of a big move. In theory, the move could be up or down. But, it is inconceivable to think that we will move higher after nearly 80% up move in a year.

Ladies and gentlemen, protect your capital!