Should we put lipstick on 'PIGS'?

A rescue would scream to the world that Greece's financial hole is too deep for it to get out unaided — just as the Federal Reserve's decision to supply US$29 billion of guarantees so that Bear Stearns Cos. could survive by selling itself to JPMorgan Chase & Co. was a red flag about the cannibalism erupting in the credit-crunched banking industry.

Let Greece go bust if it can't pay its own way. Sure, it will be messy and scary. A lot of banks will realize they still don't focus enough on the credit quality of the firms they do business with. The euro project will suffer a crisis of confidence.

The lesson from the credit crisis, though, is that the alternative of helping Greece off a hook of its own making is far, far worse.

All of the “PIGS” — Portugal, Ireland, Greece and Spain (and maybe Italy, if you're feeling particularly uncharitable or skeptical) — have been living beyond their means, much like the investment banks did in the credit boom.

A bailout of one will produce the same outcome as the rescue of Bear Stearns did; moral hazard will kick in, and instead of allowing economic Darwinism to cleanse the gene pool, the weaker nations will lose any incentive to cut spending and trim their swollen deficits.

Welcome to “Credit Crunch II.” By stuffing billions of dollars of taxpayers' money into the balance-sheet holes of the banking industry, governments have transmogrified private risk into public liabilities. The “too-big-to-fail” label just reattaches itself to governments from financial companies.

The sequel, if the European Union or its members are suckered into some kind of Greek rescue package by buying, guaranteeing or even repaying its bonds, could end up featuring Portugal as Lehman Brothers Holdings Inc. and Spain as American International Group Inc. As Dennis Gartman, economist and publisher of the Gartman Letter research report, has repeatedly pointed out in recent years, there is never only one cockroach.

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