Here is the quandary Europe faces:
Nobody wants to touch the extremely generous entitlement systems in place. Once you do that in Greece it opens the door across Europe to cuts in entitlement programs everywhere.
The EU would like to believe that the Russians and Chinese will bail them out so that they can continue kicking the can down the road. Unfortunately, both governments have rebuffed the EU over their idea of leveraging up the EFSF.
Now they are stuck on round 2 which is bringing the crisis to a head faster than anyone thought possible.
What is the catalyst you ask? The gall of the Greeks to ask for a 75% write-down versus the 50% plan that is in place. Even more galling is the idea that the EU asked the public holders of Greek debt to take the write-down while their holdings would remain at par.
Then the EU went back to the banks asking if they would help lever up the EFSF in order to buy more debt.
Let’s examine those statements for a moment. The EU and Greece expect the banks to significantly write down their debt and take losses while they stay whole and then help lever up the EFSF (without documentation) to continue kicking the can down the road.
No wonder bond buyers went on strike.
If you were sitting behind a trading desk or in a portfolio managers chair what would you do? The EU just redefined default, systemic, and other varieties of risk to unheard of levels.
Add in the comments from ISDA that the 50% write down did not constitute a credit event and you can see why investors are exiting Europe in droves and afraid of another Lehman event.
The coordinated action by central banks a few weeks ago did very little to instill confidence in the markets. Instead it made everyone wonder why an action of this size needed to take place.
The ECB, Federal Reserve and other central banks can only do so much to help support the system. The problem remains the inability of European leaders to agree on a comprehensive plan to solve this crisis and that can only come from the governments themselves.