Bottom line: Sovereign defaults by one or more Euroland countries are a certainty.

And Euroland will not be helped by the utterly foolish austerity programs undertaken so far, which do nothing other than guarantee social upheaval and more bank failures.

What’s needed is what’s been obvious all along: a recognition that you can’t run a single currency regime solely for the benefit of one country (Germany).

The Irish, Greeks, and Portuguese would be much better off leaving the Euro, devaluing their currencies, and defaulting on their debt until such time as a semblance of export-driven growth returns.

The Germans, who have been playing beggar thy neighbor for several years, need to gin up domestic consumption.

The ECB needs to cut interest rates and do a lot more quantitative easing.

All of these countries need to drop extend and pretend, stop worrying about confidence fairies and non-existent inflation, and start promoting economic growth and domestic consumption directly through government spending.

The US needs to be doing exactly the same thing, or will it be years before anything good happens in the world economy.

Gorilla says: “What began in May as contagion will be back as contagion in September!”

And of course this isn’t being discussed anywhere at all, nor are the trillions in bad debts of our very own banksters, now offloaded to the Fed!!!

It’s a giant game of extend and pretend, and it may very well end in tears…

Gorilla says: “The hurricane that will actually hit the financial system is well beyond Category 5 (and its progenitors will all be taking the fifth)!!!”

The Germans and all of the Eurozone except Greece are doing better, mostly because of the decline in the euro in quarter 2!

But that decline’s now over, the euro is back where it was before the Greek “crisis” in May.

Meanwhile, the Greeks are contracting and the bond spreads are widening again.

Gorilla says: “One quarter doesn’t yet cut the mustard in Frankfurt!”

Sounds great, until you realize that the tests did not take into account the possibility of debt defaults by Spain, Portugal, Greece, Ireland, and Italy.

Oh, and the 6% Tier One capital requirement minimum? Lehman Brothers had more than 10%, how’d that turn out?

Mostly, these tests, like the ones in the US, are about extend and pretend.

The hope is that world economic growth will eliminate any threat to solvency.

And of course, the best way to achieve this is the German and Chinese way: beggar thy neighbor!

Gorilla says: “The underpants gnomes withdrew their funds long ago!”

“We’re going to continue a disciplined fiscal policy, which doesn’t equal the usual austerity policy that affects families and businesses,” the Economy Ministry said in an e- mailed response to questions from Bloomberg News.

Them’s fightin’ words!!!

All of these rescue packages in Eastern and Central Europe are about one thing: bailing out Western European banks who lent foolishly.

While waiting for the phony “stress test results” on these banks to be announced, the ECB’s sort of austerity-based fantasy promises to keep the world economy stagnating along for years to come.

Egad, Hungary’s decided to put its own people first before bailing out the foreign bankers!

Fortunately, Hungary is not part of the Euro, so it can survive by devaluation, and if necessary partial default.

That’s not what clowns like M. Trichet want to hear, because it might encourage weaker Euroland states to leave the Euro, or convince the Germans, the sole beneficiary of M. Trichet’s idiocy, to jump before their bankers are pushed.

Gorilla says: “Forint exchange may well win this Frankfurter eating contest!”

And Spain apparently can’t really pay off its bonds and reduce budget deficits by 2012. Unemployment’s above 20%, and Spanish banks need fresh capital to the tune of 50-90 billion Euros. The outlook is for years, if not decades, of crippling deflation, social unrest and mass unemployment.

Haircuts for bondholders on the order of 30% (and you just know the haircuts actually being contemplated are far larger) would reduce Spain’s GDP by 40% and Eurozone GDP by 15%.

The stress tests currently being performed do not take into account the possibility of defaults, so the true picture of Euroland insolvency has yet to be painted.

Gorilla says: “Time for Spain to take a siesta from the Euro!”

Ah, but only 6-month debt, apparently it’s too early to go beyond 2012, when the EU/IMF rescue package supposedly ends.

Meanwhile, Greece itself will face at least a decade of crippling deflation, mass unemployment and social upheaval, all in the name of keeping the Germans happy.

To paraphrase Krugman, it’s just great living in a one size fits one fiscal and monetary regime!!!

Gorilla says: “Greece can wag the dog, but it can’t buy a Frankfurter!”

As one German wag described this endless cycle of rhetoric, inaction, and denial: “A stress test without stress”.

Nobody really wants to talk about sovereign debt restructuring, because that implies the ECB rescue package will not work.

What should be happening, namely the withdrawl of Greece, Portugal, Ireland, and possibly Spain from the euro, the devaluation of their new/old currencies, and a substantial increase in German domestic consumption, is not acceptable politically, but may happen anyway if the markets decide they’ve had enough and resume contagion.

For the first time, banking analysts are starting to talk about French debt, and if that’s in question then the Euro may collapse.

Gorilla says: “Trichet has had his day!”

Economics Minister Matolcsy: “A very fine-tuned action plan is needed, to reach the official deficit target and to put the economy on the growth track at the same time”.

Hard to promote economic growth in a world of low demand and rising unemployment by cutting back on government spending. Yet it is this fantasy that Euroland policymakers believe will keep the markets happy!

Fortunately for Hungary, they have a currency they can call their own, that currency can be devalued, and creditors can take a haircut.

Alas, there will also be a run on Hungarian banks and it’s unlikely Angela Merkel or Nicholas Sarkozy will be in the mood to be lender of last resort again.

So the talk for now will be of “waste, fraud, and abuse” and a trimming of the bureaucracy, leading to more unemployment, fewer tax revenues, and a greater likelihood of default.

Years of crippling deflation await, but eventually the forint will get back on its feet.

Gorilla says: “Goulash is one thing, but this here is something else!”