We all witnessed the dreadful consequences that the dispute between Republicans and Democrats in the Congress and the White House had on the stock market. While the deal was still being hashed out, the predominant fear was that the US might default on its bonds because of an inability to borrow more money. Once the debt limit deal was reached the focus shifted onto how truly broken and dysfunctional our government really was, and still is. It then became apparent that the Tea Party controlled GOP members in the House were willing, able, and crazy enough to jeopardize transforming the US Treasury from being the risk-free rate of return, an asset that had virtually zero chance of losing investors’ capital, into a junk bond. A move that would have dramatically altered the way people priced assets, interest rates, in other words a huge market crash.
If you thought that our debt ceiling debate was bad, wait until you read the rest of this paragraph. In our country, the debate was between politicians of the same country, in Europe however, the debate is not only between politicians of the same country but also between leaders of at least 7 different countries namely, Portugal, Ireland, Italy, Greece, Spain, Germany, and France. There are Prime Ministers and Finance Ministers from every single one of these countries arguing against each other on top of the internal conflicts between the different parties within each country. In order to illustrate how awful the European situation is, imagine if our US debt ceiling policy required the approval of other countries as well. Envision if President Obama had to plead his case against the Prime Minister of Canada and the President of Mexico because both Canada and Mexico had the power to vote in favor or against of raising our debt ceiling. All of this on top of the debate Obama had against the GOP in Congress. Such a situation would have made our US debt ceiling debate far more horrendous than the shit fest Washington put us through but this is what is happening in Europe right now. In this way the European Debt Crisis is far worse than the US Debt Ceiling talks. This is why, in my opinion, market participants are going to keep selling-off Greek and other PIIGS bonds, European financial stocks, and Global equities in general until either 1) Greece defaults or 2) the ECB and IMF totally and completely bail-out Greece. I’m talking about a TARP-like program here that would buy Greek paper (as apposed to the worthless mortgages and mortgage derivatives the the US Treasury and the Fed accepted as collateral).
The bottom line though is that things are going to get a whole lot uglier before they get even mildly unattractive.