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Will Greece Default or Not?

Monday, 24 May 2010 | 8:48 PM ET

The markets just don’t know what to do with Greece, it seems.

Witness the action on Monday, where the Dow fell 127 points, only one trading session after it rallied 125 points on Friday. But, hey, who can blame investors in this environment? They’re getting mixed messages from the press and, even worse, European governments about the Continent’s continuing debt troubles. And that’s the problem right now.

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European woes are overshadowing any recovery in the U.S.

“We don’t know how big is big,” Cramer said during Mad Money, when it comes to the size of this threat.

The Financial Times reported today that Greece is in the hole for $350 billion, more than both Russia’s and Argentina’s defaults combined, in 1998 and 2001, respectively. And the Washington Post said, “...the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.”

But in the same paper, Fareed Zakaria in an op-ed told readers not to compare Greece or Europe with the US at all. According to Zakaria, “Perhaps the largest difference is that the United States has solid growth prospects, based on economics, technological productivity and demography.”

While that may be true, Cramer said, he had to side with the first Post article. We just aren’t strong enough to withstand a Greek default.

“If Athens defaults on its debt,” Cramer said, “it would be ruinous.”

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

On the other side of the ocean is the European Union, whose response to the crisis is as confused and disparate as that of the American media. The only way Cramer can explain the rally on Friday is through investors’ belief that the European Central Bank would both back Greece through budget cuts and bring interest rates to zero to alleviate the pressure caused by those cuts. But that didn’t happen. Then at the same time Germany acted on its own to push through a ban on naked short selling, another sign of a lack of unity on the Continent.

China may be a mitigating force, Cramer said, but it’s not enough to negate the effects of Europe’s currency collapse. We know that the Chinese Communist Party is working on a soft landing, stimulating manufacturing and consumer consumption while cooling down real estate, and that could help to counter the problems in Greece. Still, as the Financial Times also said this morning, the ailing euro means earnings-estimate cuts are coming.

“The cuts may be just pennies,” Cramer said, “but they’re going in the wrong direction.”

So how do we get out of this mess? We need three things to happen, Cramer said, again pulling from the Financial Times: European government’s need to unite behind a strategy to eliminate the possibility of a Greek default. US growth must continue, as measured by employment claims. And we need to see still more proof that China understands these problems and wants to help.

“I actually think we’ll get all three,” Cramer said, “but the problem here is that none of this depends on what we do. It’s out of our hands.”

While the US is not totally at the mercy of Europe, he said, their negatives outweigh our positives. That means we can’t be bullish. But that doesn’t mean we deserve the full punishment we’ve received. In fact, Cramer thinks the negativity Stateside is overdone.

Before the European debt contagion broke out, the US looked ready to reclaim its title as the engine of global growth. Cramer doesn’t think that’s suddenly changed. Also, Germany’s stock market is down less than the S&P 500, even though that country is far more at risk. He said that’s a signal we’ll make it through this mess, and therefore the American markets are too negative. That’s why he’s recommending accidental high-yielders as stocks come down. Investors have the chance to collect those yields until share prices recover, and then they can ride the rebound back up.

Here’s the bottom line: Without a Greek default, Cramer said, we probably won’t drop more than 5%. But as poorly as the EU has managed this crisis, he still doesn’t think that will occur. So every time the Dow dips below 10,000, he recommends getting more aggressive with those high-yielders.

“All the way down to what I think could be the potential downside target of Dow 9,500,” Cramer said.

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