As this blog has maintained for some time, the eurozone has been engaged in a long, steady process of kicking the can down the road. Why’s that good and appropriate? One, it gives institutions like the ECB time to come up with stuff like the Long Term Refinancing Option (LTRO), which was a powerfully positive mechanism for the feared insolvent European banks, and for sovereign debt markets by extension. Also, this process is almost wholly political, which means it takes a lot of time to work out solutions between so many nations; so, more time is a significant factor—you’re not going to get a new treaty in 30 days. Very importantly, it allows capital markets to adjust and price in expected outcomes without inciting panic—the importance of this can scarcely be overstated. Lastly, to the extent some of these sovereign and banking ills are simply not solvable long-term without true restructuring (fairly likely in some form or another), it’s good to kick the can down the road to a day the Eurozone is stronger than it is now and can sustain the impact.
We’ve reached that stage where PIIGS-related news has essentially become a non-event. This is mostly because the dust is settling and, well, “all clear” was never a provocative newspaper headline. But markets love such things.
This isn’t exactly the stuff of Pulitzer prizes, and didn’t make any big headlines. (It almost seems trite now, how, just a few weeks ago, investors would study every sovereign debt sale as if it were theRosetta Stone of the future economy.) But its banality is probably a big reason global stocks are on the mend. Spain sold 3.4 billion euros of debt as with falling debt costs. Some will attribute this success to the European stress test results… which is probably bogus. It’s never been apparent to me why some gussied up, politicized, “tests” from the bureaucratic milieu were supposed to make us all sigh in relief. Anyway, Spain never actually had that much of a problem raising money throughout this year—stress tests or not. (Also, the tests were generally for European banks, not the countries themselves.)
Either way, this is classic “no news is good news” on the PIIGS front. And if it keeps up, another reason a market rally could be the theme of the second half of this year.