Credit and equity markets have remained in a constant tug-of-war for the past month as bulls and bears drive markets higher and lower, with no clear trend in sight. It appears that a large financial event will have to act as a catalyst, for better or for worse, in order to give the market pure direction.

The catalyst that will undoubtedly move the markets is the ongoing debt crisis in the European Union. Countries are irrelevant – the European Union itself is on the brink of a collapse and break up. First Ireland, then Greece and now Spain is the problem du jour. Eventually, the problem will plague France and ultimately, the proverbial beating heart that keeps Europe alive: Germany.

Whether liquidity providers including the likes of the International Monetary Fund and the European Central Bank will be able to provide enough bond buyback protection remains to be seen. IMF Chief Christine Lagarde recently said that current contributions to the fund aside, she wants another $400 billion as a buffer on top of the existing $320 billion it has already raised. It will take more than a buffer to stem the crisis, however. Fiscal reform, bank and loan reform, tax reform and political reform all take center stage.

“While the exit of Greece and Portugal could be justified, Eurocrat consensus seems unwilling to let a Spain or Italy leave due to their economic size and the cross border losses that would result on the sovereign and bank sides, that would threaten an already anemic economic outlook for this year and next,” Matthew Hendrick, senior analyst at Hedgeye Risk Management, told Markets Media.

The looming possibility of a breakup of the EU would produce irreversible damage and return nations to their own currencies, forcing them to borrow from more established banks and higher rates. Another troubling matter is that the European Central Bank has yet to establish a timeline of when it expects to be paid back for loaning out money to private banking institutions.

Non-European IMF members are getting annoyed with bailouts and the way the IMF is being run. According to Twitter user Sidney Lee (@sidaosantista): “Canada Finance Minister Flaherty says non-Europeans should have veto on IMF Europe role, #IMF has enough funds to provide support for Europe.”

For now, things are relatively calm compared to what could happen in the coming months. When Italy and Spain start running into difficulties with their bond auctions, the market will ultimately dictate which direction it wants to go and it will most likely be an uncomfortable ride.