What the Euro Rescue Means for Investors

Europe's politicians and central bankers have learned an important lesson.

european_union_200.jpg

The markets aggressively and repeatedly asked the question, 'Do You Want To Save The Euro?'

Last night, they replied with a resounding 'Yes!' The headline is one trillion dollars in structural funding.

But what you are witnessing is a massive sigh of relief from investors, because the European Central Bank is promising to buy European government debt—in the open market—for the first time ever.

It is an antidote to what hammered big name European banks over the past month—culminating in what traders repeatedly describe to me as 'panic' on Thursday and Friday.

The market started to begin to price-in the (normally miniscule) probability that major economies—like Spain and Italy—would not be able to fund their debt.

With big-name European banks holding 25 to 30 percent of Euro zone government bonds—that's a powerful nightmare—a scenario to threaten their balance sheets. Fear created more fear and banks became hesitant to lend to one each other. Funding gaps erupted—a Lehman-style liquidity crisis had started to grow.

This unprecedented move by the ECB, combined with the cheap dollars from the U.S. Federal Reserve or yen from the Japanese, if needed, breaks that negative spiral. With short term liquidity fixed, the market can now focus on long term solvency.

The Euro has not rocketed because austerity will still pressure Euro Zone growth. Greek debt will rise from 110 percent to 150 percent of GDP; many say that Athens will probably still default—with haircuts for investors.

But importantly, it allows the market to believe—at the least for the moment—that giants like Spain and Italy, with debt levels only half as big as Athens as a proportion of GDP, will be okay.