Montreal, Canada

The new Basel III capital adequacy rules provide a framework for boosting capital ratios in order to minimize another financial crisis. The verdict among the world’s largest banking centers, however, is that Sunday’s agreement didn’t go far enough to cushion recovering bank balance sheets.

Basel III won’t deflect another financial panic. It might boost liquidity to cover a potential run on deposits; but no regulatory agency or body can render a financial crash unavoidable.

Meanwhile, credit markets across Europe continue to recover with the entire spectrum of spread product continuing an impressive flattening since May when fears of a Greek default escalated. But the weakest eurozone members – Ireland, Greece, Spain and Portugal – continue to harbor high spreads compared to benchmark German bunds. Now it’s Ireland taking the spotlight from Greece as fears grow that Dublin doesn’t have enough cash to bailout banks like Anglo-Irish Bank and others.

The phony European bank stress tests conducted earlier this summer – aimed at replicating the spectacle contrived in the United States last year – passed with flying colors. Or did they?

The ongoing banking crises in Ireland and Greece certainly suggest otherwise.

For the most part, the European stress tests conducted earlier this summer were a farce. The markets know the system is rigged and it’s obvious to me that many European banks lack adequate capital to operate in a normal environment.

Witness Germany’s Deutsche Bank efforts to raise more than $15 billion dollars this week to shore up its balance sheet. That’s just the tip of the iceberg.

So here we are in Year II of the global credit crisis and for the most part, the eurozone’s banking crisis is still unresolved. Like a drug addict craving more candy to satiate his habit, Club Med eurozone countries are unable or unwilling to shake liquidity dependency from the ECB.

I find it almost amusing reading about successful government bond auctions in Greece, Spain and Ireland this past summer in the wake of renewed bank uncertainty and plummeting state revenues. Do you really believe these countries are successfully raising debt while, at the same time, remaining dependent on ECB credit lines? It makes no sense. I think the ECB is buying most Club Med debt, not institutional investors.

At some point over the next 24-48 months, Greece will default once its ECB and IMF loans are exhausted. Perhaps sooner. The sovereign debt crisis is just beginning. Don’t believe otherwise.