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Stocks rallied sharply Tuesday morning as traders came back from the MLK Day holiday in a bullish mood. A successful Spanish debt offering helped propel the rally, but the news coming out of Europe remains largely slanted to the negative.
After downgrading France and 8 other EU nations on Friday, S&P followed up Monday by downgrading the European Financial Stability Facility, as expected. Meanwhile, talks between the IMF and Greek debt holders broke down, raising the unexpected specter of a disorderly default rather than orderly, "voluntary" haircuts previously discussed.
ECB President Mario Draghi summed up the state of affairs in Europe Monday, declaring: "We are in a very grave state of affairs and we must not shy away from this fact."
On the surface, it seems like the market is whistling past the European graveyard. But there is a silver lining in the worsening crisis, according to Gillian Tett, U.S. managing editor of The Financial Times.
"You can argue things now are so bad, nobody can deny reality," Tett tells Henry and me in the accompanying video. "When you have a real crunch...the politicians cannot ignore it; they know they have to get their act together and find a solution."
This week brings yet another round of high-level meetings among European policymakers, including Wednesday's meeting between U.K.'s David Cameron and Italy's Mario Monti, who then meets Friday with Nicolas Sarkozy and Angela Merkel. (See: Europe's Debt Crisis: Merkel, Sarkozy and Lagarde Meet in Latest Chapter of Never-Ending Story)
These confabs are designed to pave the way for an agreement on how to aid Europe's struggling sovereigns, such as Italy, likely to be announced at the next EU Summit on Jan. 30.
While that gathering might generate some market-moving headlines, Tett is looking a bit further down the road, to March, when Greece faces its next big debt payment and the EFSF is expected to crank up its own borrowing.
In the past year, EU policymakers have danced around the crisis and seemingly taking the following approach: One step forward...two steps back...kick the can down the road.
If Tett is right, we may not have reached the end of the road in Europe just yet, but you can see it from here.
"Right now there's quite a lot of optimism, partly because people are looking at this and thinking 'at least there's going to be some kind of resolution,'" she says.
But just what kind of resolution will determine whether the current optimism proves justified.
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com
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