A message to all PIIGS shorters out there

I'm wondering what the shorters' game is. As I said before, there is no real possibility of default in an EMU country. In fact, the very notion of an EMU country folding with 120% or even 150% debt to GDP ratio is laughable, not only because it's very, very easy to fix the situation (the PIIGS governments announce a 5% cut in public sector pay, or a rise of 2% in VAT) but also because healthier EMU countries have a lot to lose by letting the PIIGS go down, both politically and economically. Worst case scenario, Germany says 'enough', and the whole thing just blows over.

So, dear shorters, you are playing a very dangerous game. You may have another 300-400 bps, at most, to play for, but you know that when that moment comes it's all going to blow up in your face - strict measures are announced, or Germany spoils the party. I can't believe that a single one of you took a second to really think about this and saw default at the end of this long windy road, so you are simply banking on making some money in the meantime. Isn't this too risky a strategy? When the time comes, how will you explain the short positions to your bosses?

If you are dreaming of Black Wednesday, wake up. Back then there was a clear endgame, and piling up the pressure just brought forward the inevitable. The situation is very different now. There is no simple endgame, and it is very easy for a country to raise another 5% or 10% of GDP in taxes (or reduce spending by the same amount) if the going gets tough (this poll, published earlier this weekend, shows 60% of Greeks supporting even stricter fiscal measures, with a mere 24% seeing the measures already announced as being too harsh). And the strong EMU countries have way more to lose by standing by than by intervening (they bailed the banks out for chrissake, you think they won't bail out the Union itself?).

So play the game if you like, but try to time your exit well - because if you are still dancing when the music stops you are so, so screwed.