Changing the rules

Take a look at the Greek debt haircut, for example. As part of the rescue package negotiated with the International Monetary Fund, the European Commission and the European Central Bank, Greece forced its private-sector creditors into a "voluntary" 70% write-down on the value of their government bonds. The deal might have been necessary in order for European leaders to agree to fund a Greek bailout package, but it had several "trust-busting" elements, which were pointed out by critics at the time.

First, the haircut imposed an after-the-fact change of the rules. Because of this, if you hold the debt of other national governments, you're entitled to wonder how the terms of your bonds might change in a crisis.

Second, the haircut was imposed only on the private-sector investors in Greek bonds. The European Central Bank did not have to write down the value of its significant portfolio of Greek bonds.

And, third, by imposing a write-down, the European Central Bank and its partners created the question of when it might happen again. The deal certainly raised the risk of holding sovereign debt in the eurozone.

And then there's the breakup

Allowing the Greek crisis to go to a stage where a Greek exit from the euro is a real possibility has had a similar but even more profoundly negative effect on trust. Suddenly analysts are digging into the details of how the euro system works. Quite frankly, you no more want to know how a modern paper currency is made than you want to know what goes into a cheap hot dog. Analysts and economists digging into the euro system have been shocked, shocked, in tones that echo "Casablanca's" Captain Renault, to discover leverage and risk in the system.

And once you head down that path, well, the scenery gets mighty gothic mighty quickly. We wind up with economists saying things like, "In a euro breakup Germany will lose to 20% of its GDP when debtors renege on their Target2 liabilities" or, "The official sector (read the European Central Bank and the International Monetary Fund) are owed 290 billion euros by Greece. Of that 120 billion amounts to Target2 liabilities."

These are real issues only if 1) the euro does break up, and 2) levels of trust sink to such low levels that, like Byzantine mercenaries, no party in Europe is willing to trust the currency or its bookkeeping systems. Even in the event of a euro breakup, the Bundesbank could simply print money or write itself a check, in the words of University College Dublin economics professor Karl Whelan, to cover what it's owed. That would seem a reasonable alternative to trying to extract 576 billion euros (or whatevers) from German taxpayers to cover what is, from one perspective, a bookkeeping entity.

Of course, you can do things like print money or write yourself a check (and then not cash it, of course) only if trust in the system hasn't vanished. As the slow runs on Spanish banks (and the not-so-slow runs on Greek banks) demonstrate, though, there's not a lot of trust in the eurozone financial system.

And I think we're only a resentful and shortsighted Greek election result -- and a ham-handed political reaction from the German, Finnish, Austrian and Dutch governments -- away from a decisive erosion in trust in the euro. The European Central Bank has already made it clear that it is not prepared to be a Federal Reserve-style lender of last resort.

So who, exactly, does stand behind the euro? Not eurozone governments, it's clear -- they can't agree to issue joint eurobonds. Not the Bundesbank, the strongest of the national central banks, which clearly thinks it has done enough.

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So who, then, thinks the euro is worth defending and who would spend some billions on defense if that were what it took?

Paper poses

And if the euro can dissolve, if the eurozone can go back to Deutschmarks and drachmas, then why should we have faith in any paper currency? The breakup of the euro won't mean the breakup of the dollar or the yen or the real, but it sure would accelerate the search for a more secure depository of value than paper money. Even one that proclaims "In God we trust."

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

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