- A €110 billion bailout was approved over the weekend, Greece agreed to a €30 billion austerity package, and the ECB agreed to accept "junk" Greek debt as collateral.
A big, bold plan is just what investors have been calling for. But fear-inducing rumors and rhetoric seem to be driving short-term swings.
More importantly, Europe is moving to contain fiscal troubles, even as the rest of the global economy keeps chugging along.
Investing legend Benjamin Graham described the stock market as a voting machine (sentiment driven) in the short term and a weighing machine (fundamentally driven) in the long term. Tuesday, investors voted with their feet, hammering stocks, despite additional weight added to the bullish case for the economy and stock market.
Though sovereign debt worries were in headlines again, US April manufacturing reported strong growth, factory orders and sales jumped in March, and March pending home sales rose 5.3%. It's important to separate the cream from the froth. Greek debt travails are very real, but sentiment is what's knocking markets most. Nothing of note has fundamentally changed the global economic recovery.
Here are the facts. All 16 eurozone finance ministers approved a €110 billion bailout package over the weekend—described as a strategy of fiscal "shock and awe" and an authoritative step toward a Greek rescue. If Greece uses all available funds, it wouldn't need to access capital markets to rollover debt and finance its deficit until 2012. In exchange, Greece agreed to austerity measures worth €30 billion: A combination of tax increases, public pay freezes, and sale of public assets (long overdue). On Monday, the ECB dropped its requirement Greek debt need be investment grade to be used as loan collateral, removing concerns European banks holding Greek bonds would be left high and dry in the event of further downgrades.
A big, bold aid package is just what investors have been calling for. So why the jitters? Mostly fear-inducing rumors and rhetoric. One report had Fitch and Moody's planning to strip Spain of its AAA rating. Both rating agencies moved quickly to deny any such thing. Another had Spain considering a €280 billion bailout. Spanish Prime Minister dismissed it as "complete madness."
In all, little has changed for the PIIGS fiscally this week compared to last week or even the one before. It's the same stragglers, the same struggles. No country matches Greek woes. Spain is bigger than Greece or Portugal (and potentially more expensive to support), but it's also in better shape than either. Portugal (even smaller than Greece) may be the next greatest sovereign threat, but it faces fewer 2010 funding challenges. Further, its parliament is set to fast-track fiscal cuts, originally scheduled for 2011 to 2013, to this year.
Other than contagion worries, there was speculation an escalating general strike in Greece would weaken political will to implement austerity measures. But fiscal cuts meeting with resistance shouldn't surprise. Greek labor unrest is perennial, and it's the third general strike this year, not the first. There's no reason this strike should make investors question Greek politicians any more than the last two.
The good news is another prime source of uncertainty—the eurozone's convoluted decision-making process—should reach resolution soon. At the regional level, the bailout has been approved, but not so domestically. Local legislatures will vote this week. Public dissent in Germany (footing the biggest fraction of EU aid) is high ahead of local elections next week. That will likely have investors on edge until Friday, when the German parliament votes on the bailout. However, France is on the hook for the next biggest share, and the French National Assembly approved 2010's portion (€3.9 billion) Monday night. The Senate will call a final vote on Thursday.
With the rumor mill churning, it's inadvisable to take action pending facts. Hold tight—this too should pass. Europe is moving to contain fiscal troubles, even as the rest of the global economy keeps chugging along.