Europe Is Fixed, Or Is It?

 
Global stocks opened sharply higher on Friday morning on news that European leaders had taken steps to lower Spain’s and Italy’s borrowing costs and moved forward in their quest to stem the ongoing debt crisis plaguing the Continent.
 
The S&P 500 (NYSEARCA:SPY) rallied as much as 2% early Friday while the DAX in Germany jumped 3.9%. The iSharesMSCI Germany Index ETF (NYSEARCA:EWG) also climbed 5.2% in early going in New York.
 
The Eurodollar took heart at the news, as well, climbing to$1.267, a gain of 1.88% and the Euro ETF, CurrencyShares Euro Trust (NYSEARCA:FXE) added 1.9% approaching 11:00 a.m. Eastern time.
 
Gold (NYSEARCA:GLD) climbed 3% to 41598 and oil (NYSEARCA:USO) rallied to $82.22, a gain of 5,8%.
 
So markets liked what they heard from Brussels, but will this be a long term improvement or just another post Summit flash in the pan rally?
 
Bullet points from Brussels:
 
1. 120 billion European growth pact designed to build infrastructure and aid businesses.
 
2. The temporary European Financial Stability Facility (EFSF) and permanent, but yet to be ratified European Stability Mechanism (ESM) will buy government bonds without the requirement for more austerity measures.
 
3. Rescue funds can go directly to Spanish banks so the Spanish government doesn’t have to put more sovereign debt on its already bloated debt/GDP ratios.
 
4. To have Item #3 take effect, the European Union needs to establish a bank supervisor which would be a first step to forming a regional banking union.
 
Here are a few sticky details potentially casting a shadow on today’s euphoria:
 
1. The ESM doesn’t yet exist and actually needs to be ratified by all 17 countries; only 4 have ratified it so far and the deadline for ratification is July 9th. Germany has yet to approve the original version.
 
2. The agreement contained no provisions for boosting existing bailout funds and so nothing has really changed from previous commitments, in other words, today’s “news” is old news.
 
3. Last week’s agreement rearranges the seniority arrangements on Spanish loans and so the ESM itself might have to be rewritten and then be re-ratified by several countries.
 
4. Spain and Italy are supposed to be major contributors to the ESM and so now, apparently, they’ll be receiving bailout funds from a fund to which they’re contributors, in other words, they’re going to be bailing out themselves.
 
5. The European bank supervisor is a precondition for the ESM to lend directly to Spanish banks. This is not something that’s going to happen overnight, most likely not before the end of 2012.
 
6. The two rescue funds that are supposed to save the day have, or may have 500 billion Euros which is approximately 20% of Spain’s and Italy’s total debt which is estimated to be approximately 2.5 trillion Eurodollars.

Bottom line:  We’ve seen this scenario play out many times before, where a post-summit rally proves to be short lived as details emerge and initial euphoria ebbs. More debt is not a viable solution to a debt crisis and the question remains, “Is there enough money in Europe to bailout Europe?”  The answer most likely is , “Not.”

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