Behind the cloud of fear that seems to have consumed markets this week, there's actually some pretty good news happening. It's half a world away -- in Europe. But it could end up changing the game for the better for US stocks.
Remember, the financial woes of smaller European countries like Greece, and the threat they represent to the European banking system, has been one of the biggest factors that drove US stocks into the first serious correction since the March 2009 bottom. Things have suddenly improved in Europe. Maybe an improvement in Europe means the correction is near an end.
Here's the story. For European banks --reeling under the weight of collapsing values of Greek, Portuguese and Spanish debt -- this week has long been understood to be a very scary date with destiny. A year ago, the European Central Bank, the equivalent of our Federal Reserve -- loaned European banks â?¬442 billion (call it $560 billion) to see them through the global credit crisis. Those loans came due this week, and the ECB announced it wouldn't renew them for another year. Instead, only three-month loans would be available.
If you're a struggling European bank, that's a big problem. Sure, the ECB wills still loan you the money. But when you can borrow for a whole year, you assure your survival for a long time at a low fixed interest rate. Three months? That's a lot of risk -- who knows when the interest rate will be just three months later when the loan is due, or for that matter, when the ECB will even renew the loan then at all.
Last week saw a lot of politicking about this in Europe, aimed at getting the ECB to change its policy at the last minute and offer more one-year loans. One anonymous Spanish bank official -- and Spain is thought to have the weakest banks of any big European country -- was widely quoted calling the ECB's policy "absurd." The finance minister of Spain was more diplomatic, but nevertheless took the unusual step of saying on the radio "I hope â?¦ the ECB will be aware of the needs of the Spanish financial system."
It didn't help that the head of France's central bank said publicly, "there are some banks that are in a less good situation that might eventually suffer." That's not exactly the kind of comforting noises a central banker is supposed to make. So it hasn't been hard to find the expression "banking collapse" in the European financial news this week.
But then a funny thing happened on the way to the banking collapse. The loans came due, as scheduled. And amazingly, about half of them were completely repaid. The other half were easily replaced with three-month loans, and other loans of even shorter duration.
At the same time, on Thursday the government of Spain conducted a â?¬3.5 billion auction of 5-year bonds. And it went fine. Remember, Spain is the "S" in PIIGS -- the nickname for the countries that aren't supposed to be able to pay their debts. Well, what do you know. Spain not only isn't going bankrupt, it can borrow an enormous amount of money for 5-years at an interest rate of just 3.6%.
But wait! There's more good news out of Europe.
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