The Guest Blog

Farrell: That Ain't the Fat Lady, That's Lazard

The Parthenon in Greece
Scott E. Barbour | Getty Images

Lazard has been hired to assist Greece with its finances.

The speculation is Lazard has been hired to assist Greece with a restructuring of its debt. That, of course, has been denied. These guys always deny, deny, deny until it's done.

When the European Monetary Union was formed no member nation could exceed a deficit to GDP of more than 3%.

Greece's looks like it will top out at 14% or more this year. And there are several others well above the 3% level. There were to be no bailouts (yeah, right to that one) and collateral for banks had to be above a certain rating. That last one was blown away recently when Greece's debt was downgraded and the EU realized that debt sat on a lot of European balance sheets. Some $1.7 trillion of Greek debt (and Portugal, Ireland, and Spanish debt) are on bank's balance sheets around the world with, apparently, half of it held by the Germans and French. Maybe the EU felt they had no choice.

But only a few weeks ago Trichet was promising there would be "no exceptions" to the collateral rule. (Today Trichet says- Euro Zone Economic Outlook Uncertain.)

On my side of the business we always get a lot of "good till close" orders. You know, I will buy XYZ if only it gets back to $X. Once close to that price the order is gone.

That has been the nature of this business since it started so it's never a surprise.

The EU, however, has blown a lot, if not all, its credibility by the recent cut and run policies. They may as well throw in the towel and step up to what needs to be done and vote at their meeting Thursday morning to step into the market and buy sovereign debt. Quantitative easing we wizards of Wall Street call it. Far from being over, this crisis is threatening to spread.

Rioting in Athens has resulted in several deaths, and the markets are voting the Greek populace will not follow the austerity program.

Short yields have been hitting 14% which is hardly the rate such paper would trade at if the market believed help was at hand.

Dave Rosenberg of Gluskin Sheff commented "You know it's bad when $145 billion in loans isn't enough." An editorial in the Wall Street Journal said quite accurately "Greece is well and truly bankrupt."

And you have to fear that Spain (Portugal might already be sunk) could be close behind. When Spanish Prime Minister Zapatero denies the talk of an IMF rescue, the cynic in me figures they are talking to the IMF about a rescue. Spain is in better shape on paper with "public" debt about 55% of GDP, some 20 points below the European average. But Zapatero's omission that total gross external debt (public and private) is 170% of GDP makes it appear he is hiding something and the markets are in no mood for the finer points of political-speak. And Spain is several times the size of Greece with almost 20% unemployment and a deficit that is 11% of GDP.

The European Debt Crisis - See Complete Coverage

And read this description from the Financial Times, "Investment is low, employment growth meager. What is rising is public debt, forecast to grow from 115% of GDP last year to about 118% this year...they suffer from structural problems, ranging from an inefficient public sector to restrictive practices in trade. Widespread corruption, an inefficient bureaucracy, and a ponderous judicial system making it one of the least attractive countries in which to do business, according to the World Bank."

This isn't Greece, but Italy.

One of five Italians is on a pension and the birth rate is the third lowest in the world. If sovereign debt contagion spreads it won't matter what your deficit might be or that you are in so m much better shape than Greece. Contagion drives everyone from your door and the run would be on. It would be Bear Stearns and Lehman redux, but on an international scale.

Gold anyone?

Back in the USA, and thank God we can come back, the news stays on the upbeat side, but with some caveats. Pending home sales were up 5.3% but that is most likely due to the rush to take advantage of the expiration of the tax credit. I'm actually a bit disappointed it wasn't better.

The Institute of Supply Managementnon-manufacturing survey stayed in positive territory but was unchanged at 55.4. That's a good number but unchanged after the manufacturing index soared the other day to over 60 makes this look queasy. Since non-manufacturing is where the jobs are, when you blend these two together the implied GDP rate is about 3%. The manufacturing index is strong since it is benefiting from the rebound in world trade. Manufacturing is about 12% of the US economy.

ADP doesn't stop trying despite its consistent inability to get the number right. But they said on Wednesday that private payrolls rose 32,000 last month. This does suggest that the underlying job market continues to improve. The Bureau of Labor Statistics official number on Friday will include some 75,000 to 100,000 census workers so don't let the headline throw you. The consensus expects a number close to 200,000.

Factory orders rose an impressive 1.3% for the eleventh increase in the last twelve months. Despite this good run, orders, says the WSJ, are still only about half of the way back to prior levels. A thing called "non-defense orders for capital goods, ex-aircraft" - and I can't believe it doesn't make me faint as well - rose 4.5%. The reason I mention it is that it is really a good measure of business capital spending. It would be great if this category could grow for a while like this.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.