Unknown Territory

I was surprised to see the Dow only off a few hundred points yesterday considering all the problems European Union finance ministers are having getting a sovereign debt rescue plan together. A 200 point loss on the Dow dramatically underestimates the amount of damage that could be done if the EU debt crisis goes haywire.

Maybe everyone is thinking the Federal Reserve will ultimately backstop Europe but, then again, the Fed can’t bail out every bank.

One thing is for sure, gold is flashing a bright yellow warning as it rocketed up around $50 yesterday and kept going higher in overnight trading. Sovereign debt haircuts are looking like they will be at least 50% for most of this debt.

Dr. Marc Faber of Gloomboomdoom.com says Greek debt should be written down “at least 80 to 90 percent.” With the amount of leverage in the banks (credit default swaps), the real losses could be astronomical, not just in Europe but in the U.S. as well.

Yesterday, French Prime Minister Francois Fillon reportedly warned fellow lawmakers of dire consequences if a debt plan is not reached.

Mr. Fillon said, “We are living in crucial times. If the summit is a failure, this could tip the European continent into unknown territory,” the sources from the ruling UMP party quoted the prime minister as saying during the meeting. “Pressure does not stop growing on the eurozone and the whole of the global economy,” the sources quoted him as saying. “It is undeniable that the forecasts for global economic growth are undergoing brutal falls.” (Click here for more on that story.)

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