Europe Whispers “Crisis” While the Market Continues Screaming

Last year the Europe Union (and the euro) teetered on the verge of collapse when the Greek financial crisis strained the viability of the EU construct. This year, as other EU countries domino in similar fashion, no one seems to care – certainly not the markets. Portugal’s government collapsed last Friday, and Standard and Poor has downgraded Portugal twice in the last week from A- to BBB-. S&P then proceeded to cut Greece’s rating further from BB+ to BB-. Yet, defying all reason, the markets have gone up.

So, why is the market reacting positively to this news? Well, in the perverse logic of a shortsighted market, debt spending is good. Going into the European crises last year, there was no backstop for a European country in trouble. The provisions for sovereign collapse were unclear and hotly debated. Would Greece be kicked out of the Eurozone? What would happen to the Euro? Would bondholders suffer losses? How would this impact banks?

The solution? Europe quickly embraced the troubled American model, socializing risk, instituting multiple backstops, and implementing enough cross guarantees to ensure that sorting through them would be more difficult than, say, trying to figure out how may countries the US is at war with. (read more)