This summer the U.S. debt problems were creating some amazing volatility in the marketplace and in the last few weeks all the focus has been on Europe.

Although there is still some concerns over how the U.S. is spending, the immediate threat to markets has been the debit problems several European countries that economists and analysts have demined the PIGS countries, Portugal, Ireland, Greece and Spain. The worst of these countries is Greece. According to reports from the Wall Street Journal, through fancy accounting the country was able to hide their debt problems from investors since 2001. The issue came to a head in 2009 when a new government came to power and the problem was fully disclosed to the public.

By February 2010 investors were quickly selling Greek bonds and rating agencies started to downgrade the country’s sovereign debt. The downgrade just exasperated the problem. Because of the downgrades investors didn’t want to buy any more bonds so the country isn’t able to raise capital and payoff their debt obligations. Because Greece isn’t able to pay off their debt they continue to be downgraded.

The problem became so bad that in August Moody’s, one of the major rating agencies, released a report saying that it was almost a certainty that Greece would default on its debt. The problem has now reverberated through the entire financial industry. Many European banks had major exposure to these countries and if any defaulted it would have a major impact on bank deposit and earnings.

Although the global economy looks pretty grim, there is some good news. Last week central banks around the globe announced they would provide banks with unlimited amounts of three-month loans to make sure there is enough liquidity in the system. So what does all this mean for traders and financial markets? During the crisis safe-haven investments have spiralled higher. Investors were jumping into anything that might protect their capital, 10-year bond futures continue to hold on to their recent gains and are now just started to fall as traders test the investment waters again.

During the summer we saw gold prices skyrocket through $1,900 an ounce, again this is due to the safe-haven trade. With major central banks stepping forward to help support financial institutions, confidence is starting to creep back into the marketplace and there are signs that the safe-haven trade is starting to unwind. However is it time to short gold prices, it could be a little too soon.

The U.S. continues to try and spend money to dig themselves out of this situation, which does not bode well for future inflation. If Greece does eventually default, it could have some major implications on the euro, which has been under significant pressure the last two weeks. It will also put a major burden on strong countries like France and Germany who have so far weathered this storm fairly well. A good quote, which sums up the problems now comes from Colin Cieszynski, Market Analyst/Education Manager, CMC Markets Canada.

“…it took years to get into the current situation and it will likely take years to get out,” he said in a recent research report. “Higher inflation and low economic growth indicates that a stagflation environment persists which could make it difficult for bulls to take the market very far either.”

For more updates from Greg, be sure to visit his blog at TheTradingZone.com