09/14/2011 05:49 pm ET Updated Nov 14, 2011

Europe Is a Sovereign Debt Crisis and a Bank Solvency Crisis

The European crisis looks to be worse than 2008 in the U.S. That's because it is both a sovereign debt problem for Greece, Portugal and possibly Spain, as well as a a crisis for the European banking system, whose shares are losing value almost every day.

In the U.S., you see, there was a sovereign debtor and a central bank, the Federal Reserve, that together staved off the crisis by pouring trillions in the financial system here and in Europe. Today, it's not clear -- but muddy --as to whether the European Central Bank, the Bundesbank (the German Central Bank) will have sufficient fire power to stave off default.

The quandary is: if the sovereigns are in trouble and contracting their economies, who is going to bail out the banks? If the risk of economic contraction has increased and the governments are in the mode of spending cuts, can the banks refinance themselves with their shares under severe selling pressure?

Europe had better muddle through -- but how? If you have some apt solutions, do let me know ASAP. I am sure the climate wasn't improved by JP Morgan Chairman Jamie Dimon offending the European banking community by strongly recommending the US banks pull out of Basel accords and go their own way with easier regulations.

In the meantime, record low interest rates aren't spurring demand on either side of the Atlantic. The overhang of deleveraging and deflationary psychology that's perplexing America is alive and well in Europe, too.

I don't want to be an alarmist, but I am getting alarmed. Until US households repair their balance sheets -- and lower stock prices and home values aren't going to do it -- neither the US, the UK, Europe or Japan will be in a position to be the motivating force for a sustainable economic recovery -- and the end of what is looking to be a new bear market.

In short, the US can't grow while shrinking. Europe can't stabilize its debt while shrinking. Japan is in a slow stagnation. China can't grow savings and consumption at the same time. Maybe there's no policy solution for everyone, except muddling through at a much lower level of growth.

As Aaron Gurwitz, Global CIO of Barclays Wealth put it today, at bottom there is "uncertainty about the ability for European governments to meet their full debt service obligations."

You had better read that again. There is uncertainty about whether some European governments can service their outstanding debt obligations. As we already know, the US just raised the debt ceiling so it can continue to borrow to run the nation and service its debt.