Europe's Mounting Crisis: "We're on Life Support," Chris Whalen Says:

May 19, 2010 07:30am EDT by Heesun Wee

http://tinyurl.com/262m6oa

Despite a nearly $1 trillion rescue plan, concerns about Europe continue to haunt the financial markets. Late Tuesday, the euro slid to more than a 4-year low against the dollar, triggering another sell-off in U.S. stocks.

Beyond the obvious problems with Europe's "PIIGS", investors worldwide are nervously wondering how badly Europe's sovereign debt crisis is affecting the banking system -- both over there and here at home.

"In some ways European banks are worse than ours. They're certainly less transparent," says our guest Chris Whalen, managing director at Institutional Risk Analytics. "It's a strange time. And I think it talks to the basic lack of competitiveness, the lack of productivity really in Europe. And you also have the same problem in the U.S. We just have the flexibility of being able to print money."

So what does Europe's end game look like?...

"For Europe, basically they have two options: Individual countries can continue to borrow money until they can't. Then they hit the wall," says fellow guest John Mauldin, president of Millennium Wave Advisors and author of the Thoughts from the Frontline e-letter. "Or they can willingly throw themselves into a Depression by cutting their deficits dramatically."

For now, Whalen says politicians aren't willing to make the tough choices about spending and cutting deficits. Instead, "we're just managing bubbles here," he says. "To me we're on life support right now. We still haven't figured out as a society, both Europe and the US, how we fix these economies and make them go again," Whalen says.

Anxiously Watching the Euro...

With the global financial markets seemingly hanging on its every move, the fate of the euro is obviously a huge wild-card right now. But Mauldin or Whalen believe it's unlikely the EU will disintegrate and the euro disbanded, as Paul Volcker suggested last week, but both believe the currency is heading lower.

"I think the euro's going to parity. The pound's going to parity," Mauldin says. "And we're going to see the yen go to $100, then $125, then $150. Pretty soon we'll get a bid for $200 and $250," which will have huge implications for global trade.

"Not one of those countries [in Europe and the rest of Asia], not any of those businesses, and any of those exporters in those countries are going to be upset," Mauldin says. "They're going to be happy because they're going to be able to export with cheap currencies against us."