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Markets have soared in the last two days.  In some overseas cases by nearly 10%.  And rightfully so.  As I mentioned previously, the Euro TARP is bullish in that it will eliminate the worst case scenario which is a complete melt-down in the banking system.  But let’s not get ahead of ourselves here.  What this plan isn’t, is a stimulative measure.  It is a defensive measure against potential further downside.  Remember, when the US government stepped in in late 2008 and early 2009 they not only implemented defensive measures.  They also implemented stimulative measures.  This plan does NOT have this component.  Therefore, economic growth remains at risk (though not at risk of collapsing as we saw in 2008 due to the banking crisis).

What’s not occurring here is some stimulative boom.  The budgets in the periphery nations will remain mangled by austerity.  Today’s passage of the Greek property tax showed the push forward with austere measures (via CNBC):

“Greek lawmakers approved an unpopular property tax law on Tuesday that is crucial to a new austerity campaign the government has proposed so it can meet the terms of its international bailout and continue receiving aid funds.”

The problem in the coming months is that the markets have to wake up to the reality that this is a much bigger issue than Europe.  And while they might be able to defend against a banking melt-down they are not defending against the increasing likelihood of slowing global economic growth.  And there’s still no confirmation on what will ultimately happen with Greece.  If Greece is thrown to the wolves the new expanded EFSF might have the capital buffer to fend off a full-blown banking melt-down, but there’s no telling how this sort of event will ripple through the global economy….

In short, we can breath a bit more easily.  Unfortunately, it’s the difference between having an elephant on our chest and an NFL lineman – we feel better, but “better” is relative.  Investors are right to be reassured that EMU leaders won’t allow a disorderly collapse, but let’s be careful about getting too complacent here….


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