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An interesting interview in Frankfurter Rundschau with German government advisor Lars Feld shares Germany's latest perspective on Greece, which is, as many expect, that the country at the heart of the Eurozone is merely setting the liquidity framework and backup preparations for the inevitable. To wit: "Restructuring Greece’s debt would cause “limited” reaction in financial markets because they have been expecting a Greek default for some time." Alas, that was the hubris that drove the decision to send Lehman over the cliff. But the world has never learned from history, why should it now? When asked if Greece is broke, Feld cuts to the chase "I fear that Greece has a solvency problem" translation - yes. Not that we needed to get confirmation with 1 Year yields in the mid 100s, mind you. Yet despite recognition of the inevitable, when asked whether Greece will leave the Eurozone, his response: "That would be a disaster - for Greece and for the euro-zone... Greece's economy and its financial system would sink into chaos, at least for a brief period time. And the speculative floodgate against the euro and its member states would open. Those who believe a Greek ouster is possible is at best naive." And therein lies the rub.

Same Sunday, Different Day. As the FX market opens, the accrued rumors from this weekend, once again focusing squarely on Greece have come to a fore. The immediate result: a EURUSD which is down 100 pips from the Friday close. Gold and ES opens in 2 hours, Asia in 4, the European bailout rumor mill shortly thereater, the central bank global liquidity pumpathon just after that, and so on. We have seen this all play out before and frankly it is getting boring.

If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day. Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro. So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it. The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment? The Fed Scheduled their meeting for 2 days. It now starts on September 20th. Maybe a co-incidence, but what better way to be prepared for new emergency policies? CDS "rolls" on the 20th. On the 21st, all Sept 2011 CDS will have expired. My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system. As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.

Since there is no point anymore in doing any analysis or wasting time thinking, here is the copy and paste of the relevant section from a just released piece in Bloomberg. "Greek Default, Euro Exit Inevitable, Std Chartered CEO Tells Sky. Default, euro exit won’t “necessarily” occur in next 1 or 2 mos., but “quite likely at some stage,” Standard Chartered CEO Gerard Lyons tells Sky News. Greece “not going to pull down Europe” or cause world recession." Actually, the last bit may be a rumor, at least if one remembers what happened to global banking after Lehman was taken down in a "controlled" Chapter 7. Anyway, Johnny 5: take it away.

Even though it has since provoked a firestorm of denials and refutations, the reality is that Dutch media RTLZ probably had some very good sources (certainly better than the FT's yesterday when China was supposed to LBO Italy for the 4th time in 2011) to release the following information, namely that according to the Finance Ministry, the bankruptcy of Greece is inevitable, and that the "question is no longer whether but how Greece goes bankrupt." Additionally, Reuters added that according to Jan Kees de Jager, "We are studying scenarios in secret together with the Dutch central bank (DNB) and also with other countries. We are looking at our own economy, our government finances, the financial sector and consequences for Europe," De Telegraaf added that the "other countries" also included Germany and Deutsche Bank. He said it was difficult to let a country go bankrupt in a controlled way. "Always, if something goes wrong there are effects on other countries, on central banks. So you will have to take into account side-effects. That is precisely the reason why we are looking at different scenarios behind closed doors." A ministry source later confirmed a report on Dutch broadcaster RTL that the scenarios being studied included default by Greece. Of course, in keeping with the European M.O. of spreading a rumor, gauging the market response, and if response is unpleasant, to immediately refute it, Dow Jones and everyone else has since reported  that the Dutch were only kidding and were not calling for an orderly default for Greece. Sure. Just preparing for one. Huge semantic difference there...

In what seems like the first honest words from a central banker in months (albeit an ex-central banker), Mario Blejer (who presided over the post-default Argentina in 2001) has some first-rate advice for G-Pap and his fellow Greeks. From an interview in Buenos Aires, Bloomberg notes the following notable quotes:“Greece should default, and default big, you can’t jump over a chasm in two steps.”

There has been a sharp increase in risk aversion with the euro and stocks internationally falling sharply due to concerns about the coming Greek default and the real risk of contagion in the Eurozone. The euro got off to a rocky start in Asia, falling to fresh six-month lows against the dollar and a 10 year low on the yen as downside momentum picked up after several key technical levels gave way recently. Gold could see weakness today due to dollar strength and the possibility of margin calls for leveraged players on the COMEX.  However, bargain hunting bullion buyers are present at these price levels and gold is likely to be supported above $1,800/oz. While dollar strength would normally result in gold weakness it is very possible that both the dollar and gold could rise together in the short term. This would result in gold making sharper gains in pounds, Swiss francs, euros and other fiat currencies. France’s largest banks by market value, BNP Paribas SA, Societe Generale SA and Credit Agricole SA, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings.  Officials in Merkel’s government are debating how to shore up German banks in the event that Greece defaults. Merkel is due to hold talks on the debt crisis with European Commission President Jose Manuel Barroso today. The risk of contagion in the Eurozone sovereign, banking and entire financial system is very real and will result in continuing safe haven demand.

Greece may not file for bankruptcy this weekend... But its time is coming - it is a 100% certainty. And throwing just that little more fuel into the fire is Germany's Economy Minister Philipp Roesler who in an op-ed posted in Die Welt, is once again planting the seeds for the inevitable day when that perpetual transgressor Greece (which just announced yet more tax hikes, and as a result can now shut down its economy as the tsunami of 24 hour strike will be unprecedented) is finally kicked out of the union. The question then, as now, will be: what next?

Just as to Italy it is suddenly America's fault the "crisis was sparked", so now it is "internet rumors" who are to blame that the market, at least in the form of CDS, estimates that the country's probability of going bankrupt is, oh, 100%.

Literally seconds after the Greek finance ministry announce that any rumors of a Greek default over the weekend are absolute rubbish (we wonder who would admit such rumors?), we get the following from Bloomberg: "Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said. The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress." Looks like at least one very "naive" government is not buying the latest batch of lies from Greece.

This email is making the rounds and catching most traders' attention:

From colleague: trader friend just hit me with the following: There is “Chatter” in the market of a Greek Default this Weekend - and their CDS is over 400 wider…  Soc Gen is off 7% on exposure - German CDS more expensive than UK;s - despite the ballooning in the CDS prices for Lloyds and RBS.

In other news, Reuters is reporting that Stark is about to retire; with announcement to come after the German market close according to sources. His potential departure is due to a conflict over ECB bond buying according to sources.

While the US was panicking over a double zero jobs report, things in Europe just fell off a cliff. As both the WSJ and Reuters report, it seems that the second Greek bailout, following repeated and consistent disappointments by Greece which has resolutely refused to comply with the terms of its fiscal austerity program, has just collapsed.And with the US closed on Monday: long a counterbalance to European risk pessimism, this week (especially with the news fro the latest FHFA onslaught against global banks) may just be the one that "it" all comes to a head. But back to Europe, and more specifically Greece, which it now appears is doomed. From the WSJ: "I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim." It is not only Greece - Italy also thought it would sneak by with getting quid pro no and continue leeching off of Europe, or specifically Germany, indefinitely, at least until the ECB said that absent Berlusconi taking austerity seriously that implicit ECB support for Italian bonds would be yanked, sending the second most indebted country in the world into a toxic debt tailspin. And so it comes that after 2 years of waffling, Europe finally realizes that the piper always eventually gets paid. Alas, it is now far too late.

Joe Biden came to China, saw, and failed to conquer the locals' ridicule. Punctuating just how "effective" Biden's visit to China was in order to "reassure that the US is solvent" (no seriously, that;s the name of the article) is a just released article in the Securities Times by Wang Tialong, member of Chinese think tank Center for International Economic Exchanges in which he went on to blatantly say that "The U.S. may be on its way to default on its debt despite the U.S. government's ability to print more money, a Chinese think tank researcher said Monday." Now this is nothing new in the escalating war of words between the two countries, although increasingly China appears to be attacking the primary loophole that defenders of the unsustainable US debt use, namely the fall back to the USD as a reserve currency. Wang went on further to implicitly accuse the US of fabricating economic data: "There is also no way to punish the issuer country if it falsifies its accounting and there is no way to restructure the issuer either, Wang said." Well, when China accuses the US of "falsifying accounting" you know you have hit rock bottom.

First they cut the rating of the US, then the went and downgraded Google, now S&P is going for the "treason trifecta" by just releasing a report which literally takes the US to the toolshed. Among many other things, the rating agency just cut US growth for the next 3 years. To wit: "While July data finally showed a slight improvement in the U.S. economy, it's not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected. We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast." We wonder how soon before the realization that the US is in fact contracting will force S&P to downgrade America even further, a move which will force Moodys and Fitch to come up with a AAAA rating for the US in order to keep the weighted average rating at current levels. It gets even worse though as S&P now openly brings the 2008 analogy: "The markets' violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good. Confidence in the recovery and in U.S. policymaking has hit new lows. After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted." And the kicker: S&P, yes S&P, makes fun of the Fed, and specifically the "transitory" nature of the economic collapse: "Continued weak growth after sharply downward GDP revisions has made the "temporary argument" a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn't cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%." And that is how you respond to endless scapegoating that now blames the S&P for the collapse. Look for S&P to make the FBI's most wanted list very shortly.

About a month ago we penned a post to refute some misconceptions about a material spike in M2, which led such luminaries as Andy Lees and Art Cashin to get confused that this may be an indication that either the government was forcing money into the population with the end of QE2, or that this was actually a confirmation that QE was working. It was neither. As we explained it was a combination of the Treasury general account on the Fed's balance sheet soaring (from a balance sheet standpoint), and due to the repeal of Regulation Q (from an actual flow perspective), that led to the move. Sure enough, in the 3 weeks following, M2 dropped to very much unremarkable weekly change levels. Until the week of August 1, or the week in which the specter of a US bankruptcy came to life, and in which the market took its first notable leg down. In that week, the broadest publicly released monetary aggregated - the M2 - soared to an all time high $9.5 trillion, or a $159 billion weekly change. This make it the third largest weekly spike in history After the Lehman bankruptcy and September 11. Then again, this data includes the traditional seasonal fudge adjustments by the Fed. A look at the non-seasonally adjusted time series indicates that last week's spike in M2, primarily in demand and savings deposits at commercial banks, was the highest on record! Sure enough, the bulk of this cash ended up in America's largest depository institution, Bank of America. And yes, this was in the week prior to the massive market rout. Yet as the charts show, following every massive inflow of money into demand deposits and savings accounts, it goes right back out the next week. Which is why we wonder: is Bank of America, so flush with cash a week ago courtesy of the debt ceiling fiasco, suddenly cashless, as investors follow up with the kneejerk withdrawal of capital from the depositor bank due to worries of bank runs and other less quantifiable reasons? Does this explain why, in addition to the fact that the bank's sale of its China Construction Bank stake is not going well, BAC may soon be forced to enter the capital markets to raise equity capital, just as we have been predicting all along?