Stocks are flying early Friday on the news that euro zone officials have agreed to lend bailout funds directly to struggling banks rather than through each nation's central bank. The move has the effect of taking the governments of Italy and Spain off the hook for their beleaguered financial institutions by reducing their debt obligations. The plan also solidifies the unity of the Euro Zone at a moment when many questioned its survival.
The deal represents a meaningful concession by Germany which had previously refused to take on the additional risk of lending to the institutions directly and as a collective. The loans would be made via the €500b European Stability Mechanism (ESM) upon the formation of a European Central Bank (ECB) supervisory body.
All of which is nice but what matters to U.S. investors is knowing whether or not the current rally is strong enough to break through resistance or just another fake-out on the last day of a quarter defined by such moves.
Todd Schoenberger, managing principal at the BlackBay Group thinks today's news means little, regardless of the move in stocks. Schoenberger thinks this is the best bailout package we're going to get right now, thus damning it with faint praise. Ever the cynic, he regards Germany's participation as suspicious. If Merkel is willing to accept this deal "there must be something else, a ticking time bomb" causing her to do so. If there is, then the plans announced last night will be no where near enough to cover the bill.
He's right, to a degree. Obviously the news from Brussels is no where near a cure for what ails Europe. Rampant unemployment, excessive debt, shrinking GDP, and a total lack of clarity as to precisely who's going to pay for what, are questions not even addressed in today's announcement.
But the lack of such detail is trumped by a directional shift in the nature of the debate. Germany blinked and is inching towards full support of the Euro Zone. The notion of a complete collapse is off the table for the foreseeable future. That alone more than justifies a rally.
Short at your own peril.
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