Do you hear that sound? It is the sound of Europe being hit with a cold dose of financial reality. The air has been let out of the balloon, and investors all over the world are realizing that absolutely nothing has been solved in Europe.
The solutions being proposed by the politicians in Europe are just going to make things worse. You don’t solve a sovereign debt crisis by shredding confidence in sovereign debt. But that is exactly what the “voluntary 50% haircut” has done. You don’t solve a sovereign debt crisis by pumping up your “bailout fund” with borrowed money from China, Russia and Brazil. More debt is just going to make things even worse down the road. You don’t solve a sovereign debt crisis by causing a massive credit crunch. By giving European banks only until June 2012 to dramatically improve their credit ratios, it is going to force many of them to seriously cut back on lending. A massive credit crunch would significantly slow down economic activity in Europe and that is about the last thing that the Europeans need right now. If the deal that was reached last week was the “best shot” that Europe has got, then we are all in for a world of hurt.
On Monday, investors all over the globe began to understand the situation that we are now facing. The Dow was down 276 points, and the euphoria of late last week had almost entirely dissipated.