Morgan Stanley's Arnaud Mares, who a few months ago made the jarring claim that a European default is all but inevitable (and the only question is what shape it will take), has followed up with the next piece in his Sovereign Subjects series, in which he attempts to quantify the practical inputs that would lead to sovereign default, and, more importantly, to government overthrow. Obviously the two are linked, and as Mares notes "out of 19 cases surveyed, on 18 occasions default was followed by the incumbent government losing elections." Which means that Europe is certainly interested in resolving its unresolvable issues in a way that affords fiscal adjustment in a way that does not almost inevitably lead to some form of government overhaul. The problem is that as the following chart demonstrates, the "fiscal adjustment" option which is the only one that at least gives the possibility of preserving incumbency, and unfortunately, this option is that one that not only impairs only taxpayers and not creditors, but is also prolonged over time and not instantaneous. This is also the option that guarantees a build up of resentment not only toward the ruling politicians, but toward the banking oligarchy, has the potential to result in a far greater, and more violent outburst of "social discontent", and just happens to be the state in which America will be trapped for a long time. Yet back to the core topic at hand: in looking at the only feasible way in which a "fiscal adjustment" could work, Mares approaches the issue from a game theory angle, and finds that only a "Deux Ex Machina" can prevent a systemic collapse. While he refers to the IMF, we believe the Federal Reserve, and its various systemic backup facilities (such as the FX swap line), are a much more appropriate subject to fill these shoes. We believe that since to every quid there is a quo, the Fed will not give Europe an infinite handout for free: the leverage the Fed will use, will be to force the ECB to keep the Euro artificially high, threatening with pulling all support if Europe defects in a world in which its consistency is predicated upon the Fed's ongoing generosity. Which is why in the race to the bottom, an eventual EURUSD parity thesis may have to be revised.