Greece looks like Bear Stearns and not Lehman

The $146 billion bailout for Greece agreed by European finance ministers yesterday is still not a done deal. It has to pass hostile legislatures in Germany and France and comes before a full meeting of euro zone leaders next week.

Markets may give this a cautious welcome today. But the Greeks themselves are rioting in the streets. For their government to deliver $40 billion in promised spending cuts by 2014 is going to be tough, and their commitment to promises has not been reliable in the recent past.

New age of austerity

But welcome to the new age of austerity in Europe. Greece is not actually the first shoe to drop. Ireland got there first with swinging public sector cutbacks. Spain, Portugal, Italy and the UK will follow. The UK will have an emergency budget 50 days after the election this week if the conservatives win as expected.

What does this mean for the global economic recovery? Well, clearly it is more dependent than ever on the US and China to pull through, and more by getting their domestic economies moving than by relying on exports.

For those euro zone countries not deeply in debt there is also a sting in this tail. How many Porsche cars will be sold in Greece this year? And this slump in demand from the Club Med plus the British Isles is going to last several years.

Financial markets will eventually take a dim view of these developments. The euro zone bailout package for Greece is not a stimulus package. It is the reverse, an austerity package.

Indeed, it looks a bit like a takeover of the national economy by the euro zone. But this is clearly a Bear Stearns moment and not another Lehman bankruptcy as far as Europe is concerned.

Spanish debts higher

Greece was perhaps too big to fail. But will the euro area countries now bailout a country like Spain whose $770 billion debt mountain is far bigger than Greece? At the very least there are a series of complex debt crises looming in Europe, and financial markets will likely get there first.

Austerity is deflationary and the reverse of economic growth. Visit Greece and Spain as ArabianMoney has done over the past year and you see some swanky infrastructure built with all this debt. It now has to be paid for and that is about the bottom line.

However, is this not the right approach? You have to wonder if the US and Japan are not also heading for bond crises with their massive debts. You cannot borrow ad infinitum. Japan is closer than the US to breaking point, and could be the Asian version of the Greek crisis, only very much larger. None of this is very bullish for stocks, bonds or real estate.