What would happen if, say miraculously the PIIGS bonds were insured or widely perceived as safe as a result of some development? Would the correction in safe haven bonds and currencies not have a sort of backlash for those currencies and their respectively denominated markets? The yield starved would exit dividend stocks and corporate debt en masse, in favor of "safer" and better (than before) yielding treasuries and such, right? Also, this would effect carry trades, or the "direction" of them very drastically, say there was an 'all clear' given, carry would reverse into a carry from the dollar or swiss franc, yes? I could very well be wrong here as I'm not nearly as well versed in theory as some others, but I had one of those light bulb moments. Enlighten, discuss, correct.
The problem is that there is no event that can make government bonds of the PIIGS less risky. Hence the problem the region finds itself in.
There are so many moving parts that "I don't know" or "let's watch and see" are often the two most credible answers. But my instinctive response to an "all clear" scenario would be a rush into European distressed assets, and a corresponding move out of overvalued safe haven yield assets like utilities and low-to-no-yield government bonds. Best trade for that type of scenario might be some sort of long financials / short sovereign debt (buying risk, selling safe havens). Currency impact would be unknown because, even if you remove political risk from the eurozone equation, they are still headed for recession. One would also have to consider the impact of whatever "event" caused the political risk to clear. If, for example, such event was the establishment of joint eurobonds or the eurozone equivalent of an FDIC, the currency would be buffeted by opposing factors coming from different directions (capital flows back into european distressed assets = bullish, anticipation of heavily dilutive fiscal policy now enacted into law = bearish, etc). My two cents is that intricate macro scenarios are often not worth all that much, because there are so many intertwining variables it is hard to pull a tradable thesis out. There is a sweet spot between trying to suss out forward looking scenarios and simply paying attention to what is happening, for the presentation of inflection points in respect to trade ideas that are technically and / or fundamentally clear here and now.
I agree with the "wait and see" statement, but I see so many moving parts and built up expectations by Mr. Market that I would more or less dismiss a resolution to these situations. With that sheer number of beaurocrats from so many different angles all hell bent on one thing or another in regards to a few central issues, it's very unlikely that an absolute resolution could be reached. Reading the essay on the Australian bubble and currency bet for some reason made me realize that I never gave enough merit to the opposite situation, what if everything did "work out", then what? More or less the same thing, what's up in the air would be resolved (not necessarily fixed but resolved between the beaurocrats) and the "wait and see" crowd would be able to see what there is to be seen, and (at least I would think) the markets would become more grounded (no pun intended) in the fact that it's lunacy for the S&P to be closing on an all time high when the world economy has at best been teetering on the brink of full out recession. Just my musings.