The European Debt Crisis

The Telegraph has an article on the European debt crisis that is well worth reading (H/T Real Clear Politics). While RCP has the title as “Europe Is Headed for a Meltdown,” the Telegraph‘s headline is the slightly less scary “Is Europe Heading for a Meltdown?” But the article is scary enough:

Mervyn King, the Bank of England Governor, summed it up best: “Dealing with a banking crisis was difficult enough,” he said the other week, “but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there’s no backstop.” …

Once a market has a change of mood such as this, the outcome is usually not a happy one, although it can take a while for the bottom to drop out. The market mood changed decisively on September 3, 1929, but it wasn’t until October 29 that the great crash occurred, and the market didn’t hit bottom (in the short term) until early December. Governments of the major financial powers had better be paying very close attention and very careful about what they say. We’re in dangerous psychological territory right now.