Europe's Shock-and-Awe Debt Rescue Plan Burns the Bears


Monday's fast-money, short-covering, relief rally in global stock markets is almost certainly overdone, if only because markets are irrational and overreactive in the short term pretty much all the time. But make no mistake: The European Union went with the so-called nuclear option in its surprise trillion-dollar rescue package, and more than anything, that move just blew away at least one leg of the bearish case for stocks.

That the 27 tribes of the EU could put aside months of squabbling to craft something so massive, complicated and dangerously creative just in time for the Asian market open is breathtaking in its own right. Usually the member states move together with all the elegance and coordination of a pee-wee soccer team.

And then, of course, there's the awe-inspiring scope, especially considering the torturous contortions Europe went through coming up with $140 billion -- peanuts by comparison -- just for Greece. The size of this rescue plan is so large that the loans are equivalent to 24% of the gross domestic products of the debt-challenged PIIGS nations -- Portugal, Italy, Ireland, Greece and Spain -- reckons David Rosenberg, the bearish chief economist and strategist at Gluskin Sheff & Associates.

"[The package] basically covers the funding needs for Portugal and Spain for the next three years," Rosenberg told clients Monday. "If credible, this package is big enough to quash contagion sovereign default risks that had been overhanging the markets for the past few weeks."

Resolving the Debt Crises by Encouraging More Borrowing

But perhaps the biggest shocker was the sudden reappearance of Jean-Claude Trichet, president of the European Central Bank, who essentially went missing as the crisis escalated last week. As recently as Thursday, the ECB chief said he hadn't even thought about using the bank's balance sheet to buy up debt through indirect purchases,. The "nuclear option," as the wags dubbed it, is a horror to inflation hawks like Trichet, but the market demanded it -- and its will be done.

After all, quantitative easing, as it's inelegantly called, was a critical part of the extraordinary measures undertaken by the Federal Reserve to fix the credit markets after Lehman Brothers blew up in 2008. Global equity markets demanded the same kind of commitment from the ECB. Turmoil in the credit markets was leading Europe into a double-dip recession, the bears argued, laying waste to all those rosy corporate profit projections -- and making stocks look very overpriced in a big hurry. Witness the 8.7% sell-off in the S&P 500 ($INX) over the last two weeks.

To be sure, there's still plenty in the EU rescue package for bears to chew on, says Ed Yardeni, bullishly prescient president of Yardeni Research. Most unsettling, Yardeni told clients Monday morning, is that the EU is trying to resolve the sovereign debt crises of its most debt-troubled countries by having the stronger nations guarantee yet more sovereign borrowing. But for now, score one for the bulls, Yardeni says, although their case will likely continue to be stress-tested.

The unveiling of Euro-TARP hardly spells the end of volatility here at home, says John Stoltzfus, market strategist at Ticonderoga Securities. "It is likely to wait in the wings for a return engagement as the mouse print, the boilerplate and all the details of the rescue package -- wherein the devil likely lies -- is perused, parsed and pondered by market participants," Stoltzfus cautioned clients Monday. "For all the relief rally celebration and feverish short covering that's boosting stock prices today, we'll leave the party hats in the box for now."