So, the buyers were right.
Those last-minute coverers and those who went long had the call of improved Chinese cooperation, which is the key to the next level up now that the Long Term Refinancing Operation has succeeded beyond its wildest dreams.
If we get growth financed in part by China and if China is willing to take a hit on some European bonds, then we could find ourselves in a virtuous circle where growth ignites tax receipts after cutbacks have been made that allows for stability going forward.
Remember, a U.S. equity investor does NOT need 4% GDP growth from Europe to make money in U.S. stocks. It just doesn't need contraction. You get past contraction you get the rest of the world kicking in, augmenting a U.S.-based recovery and you have nice rising profits. That's a way to get above where we are on a pretty permanent fashion.
But lets go back to that first proposition, because I still don't hear it said much. The LTRO has succeeded beyond its wildest dreams.
The Europeans have been so dramatically underestimated that even when they did something incredibly bold, no one believed. It is time to give the LTRO its due. It cleared up the financings of the on-the-ropes financials while causing a dramatic decline in borrowing costs for the sovereign debtors, declines that are huge enough that they will actually help tame the deficits of these countries and not send them into orbit. I can't stress how important that is because time can conquer here and work in favor of these countries. IF the Italian economy grows, it can work its way out of this hole. Even Spain can. And the big hit from Greece will be at the IMF and EU level, not the private capital level.
REMEMBER, AT ALL TIMES THE IMPORTANT ISSUE FOR U.S. EQUITIES IS THAT WE AVOID A LEHMAN-STYLE BANK COLLAPSE.
Sure, we would have liked to have seen something more sustainable than the LTRO, namely TARP where our banks were forced to raise equity and not borrow more. It can be done if you look at Unicredit's successful rights offering.
But it doesn't have to be done. BNP Paribas, France's largest bank, reported a pretty good quarter today after taking a huge amount of writedowns and selling a lot of bad loans and the stock rallied 7% on the news. If BNP had to strengthen its balance sheet, we know it could. If you believe that the EU economy is slipping into a severe recession then BNP should raise capital. But right now it doesn't seem to have to. Why don't we just chalk up its success to the LTRO, too, because it didn't risk having funding cut off while it dumped holdings because it had the EU lifeline?
If you look at the LTRO as a success, a success like TARP was, then you have a March-2009-thing going in Europe where we begin to put in a nice bottom. Under this scenario Greece, of course, ultimately fails. But it doesn't take everything with it. Consider Greece as Fannie Mae to the continent and without many other collapses the continent can soldier on, particularly with a Chinese backstop.
The next thing we need to see, if this is March 2009, is a return to growth in Europe.
I think the LTRO allows us to think about that prospect. It also allows us to think about how this money supply -- the EU is printing money like mad through the LTRO, something the bears said would never happen -- can be repaid.
Is it all fun and games from here? NOT if we don't get growth.
But if we do, it will be as fun and games as the March 2009 bottom, which is what the 7% Italian bond market with the Dexia collapse and the Bernanke intervention is starting to look like.
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