An obvious synonym for the United States is the word 'big'. Big cars, big houses and big business all spring to mind when you think of the country, but it is also big on drama.

That was proved recently as a small group of Republicans in the House of Representatives held the entire US government to ransom in a bid to de-fund President Barack Obama's healthcare plan by refusing to pass the Federal budget.

The deadlock also threatened to see the world's biggest country default on its US$16.9 trillion debt, unnerving creditor countries to such an extent that China felt compelled to issue a sternly worded statement urging the US to get its house in order.

A last minute bi-partisan deal in the Senate narrowly avoided the worst-case scenario, but since it just kicked the can down the road by a few months, we are guaranteed a repeat performance in early 2014.

It's not so much crisis averted, as crisis delayed.

But in reality, thanks to the greenback's role as the global reserve currency and a steadily recovering US economy, it was only ever going to be 'all talk and no action'.

Yes there were emotional performances, nail-biting moments and booming portents of doom, but it never amounted to a real threat to the global economy and everyone knew it. Look at CDS contracts and you will see the market was pricing in a 3 per cent chance of default.

Drama aside, if you want to get a handle on where the next credible threat to the global economy is likely to come from, try paying attention to the region that's staying very, very quiet. I am, of course, referring to Europe.

This may seem counterintuitive, especially as the data suggests Europe is starting to claw its way out of recession, with second quarter GDP figures showing the economy expanded at a 0.3 per cent pace. Austerity, still a taut leash at the throat of indebted member states, appears to be working.

Similarly, the proposed banking union is step closer to reality after the appointment of a watchdog was approved this week.

Once operational, the union should, in theory, prevent another banking collapse like the one that followed the demise of Lehman Brothers in 2008.

It is just a pity that once you dig below the headlines, these so-called areas of progress come fraught with their own perils.

The growth figures may hint at signs of life, but look pitiful compared to member state debt, particularly at the periphery.

Portugal's debt is in excess of 127 per cent of GDP, and Ireland and Italy are more or less in the same territory. Debt levels in Spain and Cyprus are pinging around the upper 80 to 90 per cent mark. Yet their annual GDP growth rates are dire, coming in at -2 per cent, 0.4 per cent, -2 per cent, 1.7 per cent, and -5.2 per cent respectively.
  
On the ground, unemployment remains high, domestic demand is weak and credit conditions are tight.

What this means in practice is that even under the most stable of conditions, it will take decades for these countries to claw their way out from under these debts. It also means that they have zero capacity to deal with cyclical or structural shocks without outside help.

And the shocks are coming.

The first is the European Central Bank's impending stress test of European lenders. This is not a bad thing, after all it would be nice to know who is likely to be the next Lehman Brothers before it happens.

But a closer look at the continent's lenders is likely to result in the ECB asking them to hold more capital or reduce the size of their balance sheets. Those who fail to do so face liquidation, and where a wind-down cannot be affected, national governments will be asked to step in.

That's problematic for two reasons. First, as demonstrated by the near collapse of the Cypriot banking sector earlier this year, the Eurozone is so intertwined that every lender, no matter how small, is considered too big to fail.

Second, as shown above, the peripheral euro zone countries have zero capacity to prop up their banks, and are likely to need outside aid, getting them further into debt. You can see the vicious circle forming.

It should also be noted that the problem isn't limited to the periphery - should a major lender fall, or even a mid-sized lender, it is likely to quickly trigger a domino effect, and no single country, let alone the entire European Union, has a balance sheet big enough to wear the shock. All in all, it makes for grim reading.

So come February, when the next instalment of debt histrionics kicks off in the US, I for one will be nervously watching the other side of the Atlantic for signs of trouble.

Source: Blowing the cover off Europe's bank crisis