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Europe has entered a new stage of the debt crisis, as funding stress in the banking sector has risen to extremes. The bond spreads of Belgium, Austria and France have risen to 290, 150 and 155bps respectively, record highs and 5 to 6 standard deviations above norm. The current trends may be unsustainable if left unchecked for more than a few weeks.

The ECB will eventually end up with a more open-ended commitment to buy peripheral European debt. However, it will probably take further turmoil to achieve this. Once the ECB acts as lender of last resort, its balance sheet expands and the quality of its balance sheet deteriorates, leading to a fall in the euro. The weaker euro, in turn, makes QE3 in the U.S. much more likely.

The lack of details behind the European Union's debt plan leads one to wonder if the pendulum swung from "not as bad" to "not as good" as it seems as if execution risk remains high. Given that the risk on dealer balance sheets is now down to levels not seen since 2003, volatility is likely to persist as very little volume is required to move markets.

More than a year since the difficulties began, the markets are again stressing over the possibility of a financial meltdown. Global economic growth is sputtering, and debt levels of peripheral European nations remain dangerously high. Many investors are left wondering if, like Sisyphus, we are doomed to an eternity of frustration.

European Union leaders have at long last reached some agreement on a blueprint to increase the firepower of the European Financial Stability Facility and recapitalize Europe's banks. Although details are still very sketchy, there are grounds for fearing this may only be one more stepping stone on the way to solving the crisis.

Unresolved fiscal issues in the United States and the European crisis continue to weigh on the capital markets. However, the author believes the United States should begin to regain economic traction in 2012 and that less developed markets will continue to exhibit relatively strong growth.

European politicians have shown they willing to act aggressively and make tough decisions, being ready to act again if the current rescue package is not enough to curtail the European crisis. However, two key issues still need to be addressed: the lack of economic growth and the mutualization of debt. Time will tell if additional action is needed.

European leaders appear to have outperformed market expectations with their rescue package, but there is still much to do. For example, the adequacy of the bank recapitalizations will be scrutinized and investor sentiment toward Italy and Spain is critical. Governance and growth challenges remain, and longer-term economic growth must be invigorated.