Now that the “shock and awe” (yes, a trite phrase, but it seems to be popular) of Sunday’s EMU/ECB/IMF rescue has receded, a few thoughts on the situation:
1. The massive pledge is just that, a pledge, and it remains to be seen how, when, and whence the actual funds will get to the intended recipients. There is much politicking yet to be done in the donor nations.
2. Assuming that the pledged funds are actually disbursed, the liquidity problem – how the debtors roll over maturing obligations and fund ongoing operations – will be solved. The European banking system will be saved.
3. This is not a stimulus, it is intended only to prevent debt default, and does nothing to resolve the problems which brought the debtor nations to this point. They will have to implement severe austerity programs which will almost certainly result in negative growth, while debt continues to climb.
4. Given #2 and #3, the debtors will no longer be illiquid, but will remain insolvent. This means that the rescue, massive as it is, only buys some time to resolve the structural problems. That is more a political than an economic problem.
5. Leadership in Europe has not been inspiring through this entire episode, and the popular reception in both creditor and debtor nations has been reluctant at best. It is difficult to see how the structural problems will be resolved to the satisfaction of all parties.
6. Over the longer term, then, there remain significant probabilities that (a) there will be defaults, and (b) one or more debtor nations will exit the euro and reissue its own currency.
I remain bearish on the euro and euro denominated assets in particular, and risk assets in general. Portfolio position remains defensive.