At their 19th summit meeting since the eurozone crisis began two years ago European officials once again demonstrated their willingness to take markets to the very brink before taking action.
And once again it worked, with markets rallying in hopes that the actions just announced will be more lasting and meaningful than the previous rescue efforts.
From the timing, one could get the impression EU officials spent much of their meeting on Thursday watching markets before feeling forced to reach an agreement. Markets in Europe had already closed down again on Thursday. Yields on Spanish and Italian bonds had risen to levels where bailouts of Greece, Portugal, and Ireland had previously become necessary. And in the U.S. on Thursday the Dow was down 175 points and looking like the bottom was about to drop out further, with an hour left to the close.
Out of the blue word suddenly crossed the tape that German Chancellor Merkel had cancelled her scheduled news conference, which was expected to report lack of progress, and word leaked that a major compromise and agreement had indeed been reached.
The U.S. market plunge reversed on a dime, and the Dow closed down only 24 points.
Then after an all-night EU session, a further announcement was made giving more information on the EU agreement just before European markets opened. And they surged up from the open, with the U.S. market also surging up on Friday.
The question now becomes whether the actions promised will be enough this time to finally contain the eurozone debt crisis. They seem to be significant. But then, each previous action had to be greater than the one before, as each failed to work.
Details are still missing, but the agreement being hammered out over the weekend is apparently one of immediate short-term actions, and an outline for a long-term plan that will be delayed until a study is completed for their October meeting. Short-term actions include allowing European banks to borrow money directly from the euro-zone bailout programs, rather than the funds going first to the country’s government and then to the banks, which was adding to government debts. And the bailout funds can also now be used to buy the bonds of individual euro-zone countries having difficulty selling their bonds, with the European Central Bank given more power to oversee the bailout funds.
Like the previous emergency actions of the last two years, this one seems to be another short-term fix that will hopefully buy enough time to come up with a longer-term solution.
The problem each time in the past has been that as soon as the markets seemed relieved by the short-term fix, officials returned to bickering and dysfunction that pushed off the formation of the promised long-term plans and allowed the crisis to come back in a more drastic form.
But we shall see. Maybe this time will be different.
Meanwhile, it does have a spooky similarity to last summer.
Last summer the market topped out on May 1, as it did this year. Last year the summer correction seemed to end at its low on June 29, when it spiked up in reaction to the euro-zone debt crisis easing overnight, accompanied by Fed Chairman Bernanke’s statement that the Fed was ready to act “if needed”.
But the rally early last July lasted only until July 7, when the market topped out into its much more severe second leg down to the October low. It had run into the reality that the easing of the eurozone debt crisis and Bernanke’s promise, did not change the fact that the U.S. economic slowdown was still worsening. And indeed the economy continued to deteriorate, as did the stock market, until the S&P 500 was down 21%, and the Fed did finally step in with ‘operation twist’.
And here we are with markets spiking on the same day this year as we end a dismal 2nd quarter and enter July, and on a similar catalyst of a promised easing of the eurozone crisis, and the U.S. Fed standing aside but promising to come to the rescue “if needed”.
And just as was the case with that one week spike-up from June 29 last year, the latest efforts to solve the eurozone debt crisis do not change the fact that the U.S. economic slowdown continues to worsen. And unlike last year, this year the worsening U.S. economy is accompanied by slowing economies around the world, with many major global markets in bear markets as a result.
Am I excited by the EU actions and the market’s sudden upside reversal? Not yet. Let’s wait and see what happens after the July 4th holiday when the next monthly jobs reports is released on July 6.
One thing we can be fairly sure of. The market’s recovery, even if it turns out to be only brief, and the actions being taken by European officials, will take the pressure off an already reluctant Fed and have it even more reluctant to come to the rescue anytime soon.