A relief rally that gathered steam on Monday lasted less than an hour in Europe as investors weighed a Greek election result seen as reducing the risk of a euro exit against concerns over Spain's high levels of debt.
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Analysts told CNBC.com the collapse of the relief rally was hardly a surprise, and blamed at least four different factors. They singled one out in particular: lack of leadership in Europe.
While it was widely acknowledged that markets remained concerned about Spain and the size of a bailout its banking system might need, the threat of contagion to Italy and Greece’s ability to form a government and keep to its bailout commitments, it was the lack of decisive action by European leaders that was blamed overall.
“Markets simply want someone to take responsibility and at the moment what we have instead is just a high-stakes game of pass the parcel,” Jeremy Batstone -Carr, director of private client research at Charles Stanley told CNBC.com
“Markets want central banks to ride to the rescue and provide some liquidity into the system. It’s not a long term solution but it would do for the moment. What they really want is someone to take some responsibility for the crisis.
But the problem is the EU authorities are bogged down by the terms and conditions of their own agreements and can’t be sufficiently nimble to do anything that is required,” he added.
Batstone-Carr’s views were echoed by David Buik, partner and markets analyst at BGC Capital Partners, who told CNBC.com he had never been more depressed in a 50 year City career than he was by the current economic outlook.
“There is nothing from European leaders. The G20 meeting this week will utter a lot of platitudes but provide no hard policy or way forward, that’s the reality of the situation,” he said.
“When are they going to come up with a workable plan? In fifty years working in the City I have never been more depressed about the outlook as I am today. To me the current outlook is terrifying.The numbers are so enormous and the implications are calamitous.”
But while it seemed to have become natural for markets to begin to hunt out their next victim in the euro zone crisis, there were one or two slightly cooler heads dispensing advice on Monday morning.
One of them was ETX Capital's senior trader Markus Huber who, in a note to clients warned against reacting too quickly to higher Spanish and Italian bond yields following sharp rises in early trade.
Spain saw the yield on its 10-year government bonds jumpto a new euro-era high of 7.14 percent. Italian bond yields jumped to 6.08 percent.
"In the past, it seems like that as soon as one issue has been resolved or rather, as soon as there is less uncertainty regarding one main issue affecting markets, attention quickly turns to next one, similar to the situation after the Spanish banking rescue last week where focus shifted onto Italy and Italian banks,” Huber said.
“Although the problems Italy is facing in the form of high debt levels and slow growth are well known, for the focus to fully shift on Italy, something else will be needed, for example, that implementing of urgent financial reforms is being delayed or that the budget deficit due to a bigger contraction in growth has to be revised upwards similar like seen in Spain."
Huber ‘s comments might have suggested Italy was safe for now, but the lack of action by political leaders was precisely what was lacking for both Batstone-Carr and Buik.
Both men agreed it was difficult to see Greece meeting its bailout commitments despite the election result.
Moreover, Francois Hollande’s election last month as president of France and German chancellor Angela Merkel’s own re-election prospects next year had led to political paralysis across the continent, according to Buik.
Batstone –Carr summed up the situation in Greece by saying there was still a lot of horse trading to be done between the most likely coalition government partners in Greece – New Democracy, which won the largest share of the vote in Sunday’s election and PASOK, which is broadly in agreement with New Democracy on the need to meet the bailout terms agreed in March with the so called troika of the European Union, International Monetary Fund and European Central Bank - and given their previous inability to agree the terms of a coalition government six weeks ago nothing was yet certain.
Regardless of whether they could form a government this time, Buik doubted the country’s ability to meet the agreed terms of the bailout anyway and suggested the only way forward was to cut Greece loose from the euro zone.
“This is not a problem we have been talking about for a few months now.It's been going on for four or five years and it became an acute problem two years ago and we’re still nowhere nearer a solution,” he said.
“My reading of the situation which is a view that not very many share is that Europe should – in the nicest possible sense - boot Greece out of the euro zone. The Greeks can’t meet the terms of the bailout agreement.The quicker we recognize it the better, and the rest of the world would look at the EU and say they were finally dealing with the problem.
“If you booted Greece out of the euro zone there would be something to rally behind. What is the point of rallying behind a country that amounts to 2 percent of euro zone GDP (gross domestic product) growth, can’t spell tax and never does what it says it will? “