The news from Europe this week has not been good. Spanish yields rose toward 7% after investors found last weekend's $125 billion bailout lacking. Moody's downgraded Spain's credit rating as a result of the bailout, which pushed up Spain's debt-to-GDP ratio. Italian debt yields rose in sympathy.
Meanwhile, Greek unemployment hit a record 22.6% ahead of Sunday's critical election that could determine whether Greece will stay in the eurozone. (See: Why the Greek Vote Matters to America: Just Explain It)
Update: "The eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy," writes NYU Professor Nouriel Roubini. "As a result, disorderly breakup of the eurozone remains possible."
Yet in the perverse logic of the market, bad news is good news because it ups the odds of the thing bulls love best: Bailouts.
Stocks surged Thursday and were higher Friday morning on reports central banks stand ready to act if Greek voters opt for the radical SYRIZA party. "Central banks are preparing for coordinated action to provide liquidity," a G20 aide tells Reuters.
European Central Bank President Mario Draghi said the ECB "will continue to supply liquidity to solvent banks where needed" and central bankers in the U.K., Japan and Canada made similarly themed comments. And, of course, traders feel pretty confident Ben Bernanke will add the Fed's firepower to any liquidity push.
It is easy, and tempting, to be cynical about all this. Each successive bailout in Europe has had a smaller impact than the last -- less than 24 hours for Spain's bank rescue! -- and there's definite risk another "buy the rumor, sell the news" trade is unfolding right now.
But the positive spin is that global policymakers are finally waking up to the acute nature of the crisis and may take more dramatic steps. For Europe, most experts agree this means some sort of eurobonds and full-scale banking union. This would require major sacrifices by all parties involved -- and a huge shift for Germany -- but beats the alternative: a disorderly unwinding of the eurozone and the potential for a financial crisis that will make Lehman Brothers' bankruptcy look tame by comparison.
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