The volatility is numb minding, or rather mind numbing. To summarise, its about debt. When we had the subprime mess, the governments everywhere could still print money and stimulate their economies. When it is sovereign debt, those countries cannot just print. The outstanding debt looks too large and no is willing to buy new bonds unless its issued at very high yields. Trouble is the countries affected are mainly inside the Eurozone. The Greeks, the Portuguese and even the Spaniards cannot issue new debt in their own currency, they only have the Euro. You cannot be issuing in Euro as you have no way of controlling your monetary policies that is set by the ECB.
If they were still in their own currency, they still can devalue their currency, which is now no longer an option. The whole hoopla was due to rumours that the Chinese were about to sell their Euro bonds holdings. Now that they have denied it, the markets all rallied, but WHAT HAS CHANGED??? Nothing!!!
The entire scenario would have to see the Euro being depressed for quite some time. Though the EMU have stepped in aggressively, Greece is not the only one playing truant. Portugal and Spain, and maybe Italy will be the "me too" category. You cannot help one without helping the others. The more they help, the more downward pressure on the Euro. I can see the Euro going down to 1.1 to the dollar with fears of parity even by year end.
The entire scenario will cub the recovery process globally as the coming theme hitting the markets will be how the EU will have a lot less purchasing power, hence exporting countries to the EU will see a dismal scene playing out.
Some may take it that Asian and Latam may be hit as collateral damage, but I think the investors will actually pour more funds into the US and emerging markets as they will be the only bright sparks. The saving grace for the past 12 months have been that emerging markets have been relying a lot more on domestic demand and trading among themselves, and that underpinning would be sufficient to pull them back up.
But not yet, lets wait till the World Cup is over people, no rush.