I’ve been writing since December 2009 about how sovereign debt will evolve into the next sub-prime credit crisis, and how it will all start to come apart with Greece.

One of the first really ugly steps down this path began this last week as members of the European Union decided to write down Greece’s sovereign debt by 50% (only 21% for government holders–“All animals are equal, but some animals are more equal than others”).

To commemorate this unraveling, I decided the scariest thing I could turn my Halloween pumpkin into this year was the euro–Europe’s supposed common currency.  At right, that’s my Jack-O-Lantern at the top, with my wife’s cat and my daughter’s Blue from Blue’s Clues below.

My mother-in-law was not, I think, amused by my choice (she’s German), but I was.  Not only was Europe’s plan inadequate, but it also set in motion some market dynamics that may reverberate for some time.

One of the games European officials decided to play was to describe the 50% write-down as a voluntary restructuring instead of a default.  This may seem like a minor technicality, unless of course you own Greek debt and bought insurance on its default (which won’t be honored, now).  It sounds like the Europeans are going to violate the sanctity of contracts, and that has left a lot of folks who bought insurance scrambling, and with big questions.

Can you buy insurance on sovereign debt and really be insured?  It doesn’t look like it.  In fact, the market’s rally last week may very well have been due to investors having to cover investing positions rather than a positive evaluation of Europe’s “solution.”

No, Europe has not solved Greece’s debt problem.  They just kicked the can down the road a little farther (a 90% write-down will more likely be necessary, followed by major structural reforms to Greece’s economy).  

No, this solution will not build confidence that Ireland, Portugal, Italy or Spain’s debt problems can be solved, not to mention Belgium and France (French, German and British banks own a ton of Greek, Irish, Portuguese, Italian and Spanish debt–now you know the real reason why they are searching for solutions).

No, this will not be good for the economy in the long run.  No, this is not a model for solving the same huge problems that exist in Japan and the U.S. (due to Medicare, Social Security, Illinois, California, New York, etc.).

This problem will be with us for a while–probably another 5 to 10 years.  But, when we get past it, the global economy and stocks will go on a 15 to 20 year bull market.  

Until then, we’ll have to be satisfied with lower returns, preservation of capital, and a little amusement as Greek Tragedy justly punishes those who haven’t learned from history.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.