Europe continues to be a major concern for the global economy. Today, Fitch downgraded Italy and Spain while earlier in the week, Moody's downgraded Italy. Meanwhile, the French and Belgian governments promisted earlier in the week to bailout and/or restructure Dexia (a bank with ties to both governments). European leaders have begun to discuss recapitalizing banks to prepare them for "restructuring" of Greek debt, which seems to be just a matter of time (November or December?). This is an important step to limit the potential damage of a Greek default (prepare banks for losses on sovereign debt), but it should have taken place a long time ago, particularly when Europe conducted stress tests for its largest banks (you may recall that Europe conducted stress tests on banks earlier this summer, but neglected to account for a possible/likely default by Greece).
The global financial system is showing more stress than any time since the end of the financial crisis in 2009, as evidenced by increasing credit spreads for investment-grade debt globally as well as high-yield debt in the US. Given the fragile financial environment, corporations have chosen to step back from issuing bonds, thus hindering investment plans and economic growth. Clearly, the US and global economies are facing many headwinds, but resolving the European debt crisis is essential to restoring economic stability.