Investors take 50% loss on Greek bonds, bank shares rally

The stock market is a strange place. As it became clear that Greek bond holders need to accept a 50% loss, the banks with great exposure to sovereign debt mysteriously rally: Deutsche Bank and Morgan Stanley are up over 17% today, whereas UBS, Citigroup, GS, JP Morgan and BOA are all up around 10%.

How does a 50% loss in Greek bonds translate into a 17% rally?

Well, quite simple: either the market was wrong yesterday about the economic prospects of Europe, or they are wrong today about the economic prospects of Europe. Or both. In fact, probably both.

Disregarding today's stock market rally, you can only imagine the jealousy that is building up in the other struggling European economies at the gift packet given to Greece. Portugal, Italy, Ireland and Italy must be green with envy, and by now have probably laid great plans for forcing their sovereign debt holders to accept a loss.

Nobody seems to be concerned with "moral hazard" any more, a term whose usage peaked in 2008, and quickly fell into disuse.

It should be just a matter of time before the other countries line up to get their debt forgiven. But I do not expect the market to rally when the subsequent debt forgivings happen.