This weekend was some hot fun watching Washington sweat over the debt ceiling wasn’t it? Treasury Secretary Tim Geithner rolled out some scorching language to let Congress know how he felt. “Catastrophic damage” as a description of things to come if we fail a debt payment sounds extreme, but then again when was the last time the most important economy on the planet nearly collapsed financially. Oh, right, it was less than 3 years ago… my bad.

 As I wrote Friday after the dismal jobs report confirmed the economic slowdown, “I know there are many backroom conversations going on to prevent another disaster. The heads of central banks are always having private conversations about market sentiment and perception. In the fall of 2008 when they orchestrated a lowering of interest rates around the world, I coined the term ‘global central bank’ or GCB. They know it’s a confidence game and they are not about to lose this round over the stupid US debt ceiling.” While Congress whines and politicizes, Geithner and Bernanke and the collective GCB are making sure lawmakers have the right information to do the right thing soon.
 
Speaking of collective efforts to forestall catastrophic contagion, the Europeans continue to take their sweet time, relying more on “how bad does the market think this could get?” rather than “let’s not give markets anything more to worry about.” Case in point, the euro continues to break down, breaching some support at $1.41 to the dollar and getting ready to take out $1.40 as technical sell programs kick in. I wrote last month that the euro was a sell on any rallies above $1.45 because I thought the top was in at $1.49. So don’t be shy, get in there and sell! All kidding aside, as goes the “barometer of risk appetite” that I call the euro, so too other asset classes like stocks and commodities, at least in the short run. 

And while Greece burns and Spain’s risk premium vs. Germany on 10-yr debt rose to a record 300 basis points this morning, talk is that the eurozone bailout may have to be doubled to 1.5 trillion euros to handle the unfolding debacle in Italy. All the back room talks among central bankers and finance ministers for the past few months must finally becoming to the conclusion that Greece will indeed default on some debt to get this chapter of the crisis over with and build a fresh start.

The painful medicine is not just for the Greek people then; it is obviously for the commercial banks who hold that debt (French institutions own the majority of the seemingly worthless Greek paper). Now that Italy looks worse than they imagined, the mood in Europe may get a lot worse before it gets any better.

Other than Alcoa (AA) kicking off Q2 earnings season today after the close, we’ve got a good amount of data points for the market to pivot off of this week. Trade numbers and the FOMC minutes are released Tuesday, while Ben Bernanke begins two days of testimony before both House and Senate Congressional committees Wednesday in his semiannual addresses on monetary policy.

Given the economic slowdown and debt battles, you can be sure he’ll get lots of off-script questions from members about both issues that should provide provocative insights from the man everyone either expects to solve their problems, or who they just love to hate. Thursday brings PPI, Retail Sales data, and earnings from Google (GOOG). Friday offers CPI and Industrial Production, as well as the Empire State Manufacturing Survey which, speaking of hate, was a number we really didn’t like last month.
 
Happy Monday All! And if I sound to be making light of these situations, know that I think the American economy is doing just fine and the recovery will keep humming. We knew we had to work through these sovereign debt issues sooner or later, and we might as well do it while corporate earnings are strong and stocks can handle the emotional volatility.

 
Zacks Investment Research