There doesn’t appear to be anyway out of the sovereign debt problem short of printing money. Euro bonds don’t seem to have much traction although the idea is a nice hail mary and may still arise from time to time. If the countries in Europe wanted to be more like the United States of Europe, they should have had a political union, a unified army, and a democratically elected United States of Europe government before they undertook monetary union.
Several large systemically important European banks will fail unless bailed out by their prospective Governments. Oops, they can’t print money the way the U.S. can. So how will they bail them out?
This will unfold the same way as the mortgage meltdown happened. Ultimately the governments including the U.S. (strange that we would bail out European banks but we are the largest contributor to the IMF and have a history of bailing out foreign banks) will recapitalize the European banks that are going to fail because they have no other choice. Shareholders will get wiped out, bond holders get a hair cut and so on. But where is France, Italy, Greece, Portugal, Spain going to get the money? The Chinese will pitch in probably for favorable influence, the U.S. will help, but I don’t think there is enough money or tea in China to solve this problem. They will have to print more. And the only way I can see how to print more is to have your own printing press which means leave the Euro. So one by one, countries will find this works, they can re-inflate themselves, negotiate an end to their debtor’s prison and start down the road to fiscal sobriety.
So, how do we play it. If you can short the European banks, this has been the most obvious way. A less rewarding but I think ultimately successful play will be to buy long dated puts on the FXE, the Euro currency. The reason I prefer buying puts as opposed to shorting the ETFs is that the market is very oversold and the market is fixated on a rising FXE with the risk on trade. The market goes up, the Euro rises, gold falls, interest rates rise, so on. Eventually the tide will turn on this trade.