In my years of studying market panics, I have come to the conclusion that the market event that precipitates a panic is always an unexpected event away from the market. Allow me to explain.
Currently, everyone has their eyes on the PIIGS believing that one of these countries could default sending the market into a tailspin. I can guarantee that the default of Portugual, Ireland, Italy, Greece or Spain will most definitely not be the straw that breaks the camel’s back. The politicians, bureaucrats and bankers are fully aware of these risks and have deployed an impressive amount of cash to maintain the status quo.
The precipitating event will be like this recent court decision declaring $785bn in Russian debt an existing obligation. Theoretically, this decision could raise the Russian debt to GDP level from about 10% today to over 60%. This would wreak havoc with the markets. While the PIIGS situation was being addressed with gobs of liquidity, Russian bond prices would plummet causing the margin calls and withdrawal of credit that starts a market panic.
Don’t worry, because this is an unlikely scenario. There is another court decision from 1997 where tsarist debt was paid at about 2% on the dollar, and this is a more likely settlement outcome for this case.
This Russian situation is just an example of what can cause the next market panic. The politicians, bureaucrats and bankers are tending to the problems of which they are aware, but ultimately it will be a completely unanticipated event which will knock down the house of cards.