Calling Europe "the most serious risk now confronting the world economy," Treasury Secretary Tim Geithner made an urgent plea to EU policymakers this weekend:
"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally," Geithner said in an official statement to the International Monetary Fund. "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."
After another weekend of dithering and empty promises, it seems the message was starting to get through Monday morning; at least, market players seems to believe it will.
Stocks rose early Monday on reports of plans by EU leaders to increase the size of the European Financial Stability Facility (EFSF) bailout fund and rumors of an impending rate cut by the European Central Bank.
But the rally effort petered out fairly quickly on a sense there is "more smoke than fire," as Mark Dow of Pharo Management put it via email. "People are sussing out that there is less to the chatter than the reports implied. There is no there, there—at least yet."
After trading at 10,898 early on, the Dow had recently given back about 100 points of its initial pop. Considering the index fell 6.4% last week, its inability to sustain a "reflexive" bounce for more than a few minutes should troubling to those long and hoping for a sustained rebound. (Update: Stocks were back in rally mode midday; in recent trading, the Dow was up 167 points, or 1.5%.)
Gold was down more than 2% and hovering just above $1600 per ounce and silver was down another 5% in recent trading as commodity bets continued to come unwound. (See: Sum of All Fears: Stocks, Commodities Tumble Over Risk of Recession, European Implosion)
A Glacial Pace
As for the chatter itself, speculation is the EFSF could be increased to 1 trillion euros (about $1.37 trillion) from its original 440 billion-euro. That would be used to create a very big, very heavy Euro-TARP to stabilize the banking system, which is braced for a restructuring of Greek debt. (There has also been chatter of a 50% haircut for Greek debt holders, although EU officials have since denied that's in the offing.)
Meanwhile, the ECB has dampened speculation it will use its balance sheet to leverage the EFSF, something Geithner has also advocated for.
"European officials seem to be finally coalescing around a Greek default but with so many cooks in the kitchen, the pace of decision making is unfortunately glacial," writes Peter Bookvar, market strategist at Miller Tabak.
As Henry and I discuss in the accompanying video, the good news is European policymakers seem to be finally waking up to the fact that just throwing money at Greece won't resolve the crisis. The bad new is that they're still moving without a sense of urgency. The worse news is they apparently will be following the playbook Tim Geithner set in 2008, when debt holders and banks were largely shielded from losses in an effort to "save the system."
- Tim Geithner