Don't Panic Over Europe

MILAN — Financial investors would prefer Italy avoided new elections, concerned they would just postpone economic reform and bring little hope of resolving a parliamentary deadlock, a survey by U.S. bank Morgan Stanley showed on Friday. Only significant funding problems and a much deeper recession would reignite the sort of fear that pushed Italy’s 10-year bond yields above 6.5% in July, according to the survey of 317 market participants carried out this week.

Jeff Miller submits: There was big news yesterday. As usual, the trading reaction takes the simple approach -- as it should. There is something bad happening. It could be contagion. It could be systemic risk. There is rioting in the streets. This cannot possibly be good news, so let's sell.

Andrew Wilkinson submits: Risk aversion continues to underpin the foundations of a powerful advance sending the dollar index to a 10-week peak as investors unwind positions vulnerable to an avalanche of fear. For investors confident in the global recovery theme, there remain two stumbling blocks. Eurozone sovereign debt fears have been reawakened in the aftermath of an €85 billion bailout for Ireland.

Two quotes from Barney Frank talking to Ezra Klein: What’s the most important part of financial regulation?

By Jeff Miller: What do you think is the biggest problem for the individual investor? My vote goes for the ability to handle risk. While investors grasp the concepts of risk and reward in a general sense, the implementation is a problem.

Sudden Debt submits: With Ireland in political turmoil over its application to receive bailout funds, it is becoming obvious that we are getting caught between a rock and a hard place. On one hand, markets (a euphemism for the unholy alliance of public pension money and the private money of the ultra-rich) are no longer willing to roll over the existing debt of the over-indebted, never mind increasing their exposure, at anything approaching reasonable interest rates.

Jeb Handwerger submits:Economic sentiment rose to a 28 month high in Europe after the panic sell off earlier this year when the Euro collapsed. A major rally has ensued after the most severe financial panic in the Euro’s history. Now the rally is pushing higher, but have the concerns dissipated? I am extremely concerned about this rally off of June lows for several reasons.

George Magnus is worried about the possibility of sovereign defaults among OECD countries. He says that “[c]oncerted fiscal restraint could trigger another recession,” which sounds to me like an argument for avoiding concerted fiscal restraint. But he says “the lack of it could end up in bigger default risks.” This is obviously true. Concerted restraint would almost by definition reduce default risks. Then again, it could also trigger another recession. That seems like a high price to pay to me.