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If you want to know what’s really going to set off the long-awaited Eurozone meltdown, look to the Lusophones.

In his first note to investors back from his trip to Europe, Cumberland Advisors’ David Kotok writes he’s only grown more pessimistic on the situation, citing runs on Portuguese banks.

“In my view, the situation in Portugal is unravelling.  This may be the second shoe to drop in the European sovereign debt saga.  Now that Greece has paved the way, the speed of unwind with Portugal may be much faster.  I do not believe the markets are prepared for that.”

He adds that Portuguese credit spreads are so wide because the markets sense that another collective-action clause could be invoked, as was threatened for Greece.

The private-sector holders of Portuguese debt know that a CAC can be used on them, too.”

He also homes in on a subtle but portentous semantic trend that’s emerged. Officials are no longer talking about “ring fencing” but rather “firewalls.”

“Systemic risk needs big firewalls.  We learned that the hard way with Lehman and AIG, which were systemic, vs. Countrywide and Bear Stearns, which were “ring-fenced” – or thought to be ring-fenced at the time.”

Finally, Kotok warns that the crisis will get real ugly again as elections near.

“The political risk is rising daily.  Elections could change these governments, and the new governments may repudiate the actions of the old ones.  We expect more strikes and unrest.”

See David Kotok’s full commentary at Cumber.com >

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