Thursday, October 27, 2011

Market Goes Nuts Over Last-Ditch Euro Debt Deal

Today's big news out of Europe was hardly a surprise but the market acted like it had never been priced in.  An agreement to draw a firebreak around Greece's debts using French and German money has been obvious for days if not weeks.  Maybe sellers are finally glad they found one last group of gullible buyers onto whom they can offload some equities before everything is shredded. 

I give my readers credit for being intelligent, but the odd few might need an explanation of my sarcasm.  The EFSF as presently constituted is still too small to backstop anything beyond a bailout of banks holding Greek sovereign debt, even with principal writedowns.  Any further deterioration in Greek state finances, or even further hints of trouble with Spain's or Italy's debt, will overwhelm the EFSF's ability to respond in time.  European governance is too fractured to reach a broader bailout agreement, and the European Central Bank is too weak to backstop banks unilaterally or flood the market with liquidity. 

This means that any further bad news at all from Europe will require the U.S. Federal Reserve to immediately offer massive dollar swap lines to shore up the euro and its member states' various underwater banks.  The future of European unity now rests with Washington.  Europeans have done all they can for themselves, once again.