On top of the $145B Greek emergency loan package, we now have another loan package worth 750B euro or roughly $970B to help stave-off a default from any of the PIIGS: Portugal, Italy, Ireland, Greece and Spain.

Here’s how it breaks out:

The good news is we can now effectively take a near-term sovereign default in Europe off the table. That means we’ve bought time for banks to make money at a record setting pace and store it on their balance sheet to get ready for the eventual wave of defaults and write downs that will come. Don’t think I’m right?  Look at last quarter’s earnings for large US banks. It was either their most profitable ever or almost. Plus, they’re buying mountains of treasury bonds. It’s a similar story in Europe. They’re not reinvesting in technology, not issuing dividends. This is exactly what they’d do if they were storing up money because they knew they’d need it.

But beware.  Wall St will spin this into a story that goes something like this:  banks are blowing away their earnings estimates. Therefore bank stock prices are underpriced and headed higher. Since the financial sector always leads us out of recessions, all is well. Come on in, the water’s fine.

This latest move by the IMF & EU is the so-called nuclear option because it was just about the last move the European Central Bank -ECB – could take, and it is a desperate and dangerous move.

Here are some very troubling facts about this latest bailout:

So now what we have is $1.1T in loans available to Europe’s riskiest countries – the PIIGS – or indeed any of the 27-member EU. The game plan is to be able to loan money to anyone in Europe – both central banks as well as commercial banks so they won’t have to rely on raising money in global bond markets like legitimate businesses and governments.

Here’s what this $1.1T effectively buys. It buys the Europeans 3 years to get their balance sheets in order. That means drastic spending cuts, increased taxes, and aggressive debt payments. It puts Europe in an economic strait jacket that will result in a regional recession for several years, and outright depression in the PIIGS countries. That’s the best case scenario.

This scenario relies on the citizens of the PIIGS countries making sustained sacrifices at a level not seen since the second world war. Unemployment in the PIIGS countries will rise dramatically to the 15-20% range. We know that Spain is already living with 20% unemployment and it has not yet begun to cut.  This best case scenario also relies on the PIIGS countries suddenly and massively improving their efficiency and productivity, and do it without protests and strikes.  Anyone want to make that bet?

The worst case scenario is so ugly, I don’t want to talk about it.

The most likely scenario is at least one country – almost certainly Greece – choosing to cave under a public backlash and pressure within the next 1-2 years and decide to do the inevitable: default. This will happen because Greece is staring at 3+ years of 4-5% per year economic contraction. To put that into perspective , that’s a harsher collapse than what we saw here in the US – and for at least twice as long. The IMF optimistically predicts Greece will have to endure a 1-year 4% contraction in their economy, followed by a mild 2% further contraction the next year, before growth begins. Don’t think a European country can possibly see a 4% per year economic contraction?   Latvia saw their GDP drop 18% last year. Ireland lost 11% last year.

The European debt crisis has been decades in the making and has now come to a critical mass. With luck, we’ve avoided the financial equivalent of a nuclear melt-down. But there’s a price to pay -and that will be economic stagnation in Europe for several years -not unlike what Japan has lived through for the past 20 years – hopefully milder and shorter.