Europe Hammering Out a Deal: Is the Euro in Trouble?

Europe is facing a staggering debt crisis much like what was experienced in the U.S. just a couple years ago. The problem with systemic crises that involve debt is they linger for years. Some speculate that the EU could be facing a multi-trillion dollar problem. Currently, they are uncertain on how to save ailing countries like Greece with a 1 trillion euro bailout fund known as the EFSF.

France and Germany have been in talks to lead Europe into a safe recovery landing. They are split on how to handle the problem though. France's Sarkozy would like to turn the EFSF bailout fund into a participating Euro zone bank enabling it to sop up printed money from the European Central Bank. Germany is opposed to this idea. Another suggestion was the creation of bond insurance for sovereign debt that is ready to default. Yet, many would say that insurance is only beneficial when there is not a concentration of bad debt.

So far Germany and France are calling for a 9 percent capitalization of banks and a 60 percent Greek write-down or "haircut," according to Reuters. These are steeper figures than before with 6 percent capital ratios and only a 20 percent Greek debt write-down.

This could spell disaster for the value of the euro, which is trading near $1.41 -- a very rich price considering the amount of trouble Europe is in. At that price, markets seem very complacent, or perhaps hopeful that a European bailout will fix everything like it did in the U.S. Yet, the numbers are becoming more and more drastic, and the problem seems to be more and more pervasive.

If France is under pressure of a credit downgrade, how are they supposed to be part of the solution? What's more, the U.K. wants nothing to do with any bailout. And according to a Reuters statistic, a 9 percent capital ratio, 60 percent write-down -- all else remaining equal -- there will be a bank shortfall of €257.4 billion, more than twice the projection given by the stress tests out of Europe. That equates to 67 banks failing without any intervention.

When banks fail, a lot of their assets unwind, which results in major imbalances in currency markets. Expect the euro to come back down to face reality, and even plummet with currency volatility spiking up.