The expected relief rally occurred worldwide following the announcement out of Europe that some agreements had been reached on a Euro-zone rescue package. As with anything of this magnitude and scope, the devil is in both the details and the implementation. The good news here is that European politicians have shown that are willing to act aggressively and make tough decisions when pushed hard. While we believe that the package as currently outlined is not enough to put paid to the European crisis, it does seem to show that the politicians will have the fortitude to act again when necessary.
There are two major elements that we believe still need to be addressed: returning economic growth and what can be referred to as mutualizing the debt of peripheral Europe. The plan does not address any steps to bring a return of growth to the Euro-zone in general, and peripheral Europe in particular. Without this growth, the debt arithmetic becomes unmanageable. Continental Europe is currently skirting along above recession. Regional PMIs are pointing towards recession, and fiscal tightening is likely to lop 1% or more from GDP, so these issues will still need to be addressed.
The mutualization of debt is much trickier matter, and may not even occur. The politicians have promised to address this issue in December and come up with an implementation plan by March 2012, however, any plan of this type will have significant political hurdles, including parliamentary approvals, treaty changes, and referendums in some countries. It is more likely that the ECB will institute a de facto mutualization of debt by simply buying up peripheral European debt in the same way the Fed has done with US debt. The ECB has basically unlimited funds and is backed up by the EU treaty, and the incoming ECB President Mario Draghi has already stated that he is in favor of this process.
In sum, it was good news, but much more still needs to be done.