Although the details are different, it appears that European Credit Markets are following a 2008 path.

I think that something could be done-haircuts on all bad debt including a 30% markdown on Italy and Spain probably amount to $500 billion, less than the $700 billion Euro banks received in 2008.

The problem is that there are no clear policy mechanism to re-capitalize Euro banks. At least a trillion of short term bank debt needs to be rolled over and this will be difficult given the bank's poor capital situation.

The real fear is that none of this gets fixed and a broken finance sector leads to even more losses.

At the risk of sounding simplistic, I would take risk off the table on big up days until bank lending spreads--Euro OIS vs. Libor spreads return to normal levels.

Yes, the market is cheap, but in rapidly changing environments valuation matters less.