What the Mother of All Bailouts Means for Investors
May 10, 2010
– Comments (5)
In an incredible weekend development, the EU has established a near $1 trillion bailout plan for the entire European continent in the hopes of preventing a string of sovereign defaults. Stocks are rocketing up on the news, making it a nice day for those of us who believed all along that Europe would ultimately step up to defend the euro and therefore that stocks in countries such as Portugal and Greece were largely oversold.
What the plan essentially does is bind Europe together so that it can borrow as a union rather than as individual member states. This is a historic development and one that will have significant long-term implications. Leaving aside the merits of this bailout for Europe, what this means for investors is that the EU is willing to preserve the EU at incredible cost. This is good for the countries that have already been sold off (Greece, Portugal, Spain) and very bad for the countries that have held up relatively well (Germany, France). It's also likely in the long-term bad for the euro since it was heretofore viewed as a relatively safe currency and its risk profile as a reserve currency is now heightened. Thus, we should see convergence now between things Greek (risk assets and southern European bonds) and things German (EUR and flight to quality). This is why companies such as NBG and PT are rocketing up today.
I also agree with this take from David Zervos of Jeffries & Co.:
My quick thoughts on markets are as follows: great for risk assets, terrible news for bunds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations.
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