bear market is over, page-120

The EU debt crisis is due to an erosion of confidence in policymakers ability to prevent a spread of contagion. The problem is one of collective psychology (ie. social mood) not financial (which is merely a symptom).

The public loss of confidence is not only in sovereign debt but the entire banking system. About 3 months ago Dexia passed the EU bank stress test with flying colours. Just recently it was forced into its second bailout by the French & Belgium govts. Now, after taking on so much bad debt, France is being threatened with a debt downgrade.

If France loses its AAA credit rating the entire EU bailout fund would also lose its top rating. That would throw the whole EFSF into disarray. The EU is like a group of mountaineers roped together but one by one they are losing grip and falling so that the other climbers must take more of the load or risk falling too. Germany is the strongest and best equipped climber. But even they have their limits. In the end, the German people will decide when the rope must be cut - not the policymakers.