- Mass Downgrades: Is Europe Doing something wrong ?

It was expected and, to some degree, it was already priced in by the markets. But the mass S&P downgrades of Friday are certainly ill-timed. Just this week we had a considerable improvements in both Spanish and Italian auctions. This improvement could now be jeopardized by a negative outlook that could be the prelude to further downgrades.

S&P criticized the policy response. I would say that many European countries are already in the process of enacting important reforms and need more time to address the problem. The downgrades were expected since the S&P downgrade of the U.S.
It was completely inconsistent to have U.S. with a AA+ rating and some European countries like France and Austria with a AAA rating so, in a way, the S&P downgrade more backward looking. While in the short term this downgrade might impact the markets
I do not see this a game changer in the European reform process.

- Greece has to avoid default

Greece has to do whatever it takes to negotiate a restructuring of its debt without defaulting. It is rumored that a number of creditors might would want a default to be able to claim compensation from the CDS but this would have very negative consequences for the European markets and for Greece.

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No Global Recession, the end of the European Crisis in 2012
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Markets in 2012 started with a rally and this is not surprising as equities, especially European ones, are priced for a global recession or a meltdown of the euro and both events will not occur in 2012.

Positive economic data from India, China and the U.S. confirm that we are not heading for a global recession.
While the European situation remains fragile many companies are already pricing in a European recession and are therefore attractive.

The U.S. Economy is very likely to rebound in 2012 making U.S. equities attractive too.

European markets are largely oversold and still present a good buying opportunity for 2012.

While a final resolution of the European Crisis might not materialize immediately many of the austerity measures, like in the case of Italy, have already been enacted and this will help in restoring investors confidence. With the European bank liquidity issue being now solved by the ECB measures I expect Italian and Spanish bond yields to normalize soon. Some Europeans markets, like the DAX, experienced step declines in 2011 and are likely to recover in 2012.

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Commodities rebound in ...

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The ECB "Bazooka"
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The ECB "bazooka" came in form of unlimited, low interest, long term 3 years loans to European banks. While this is not what the market wanted (a blanked guarantee or unlimited purchase of European Sovereigns) the latest ECB move solves the big problem of bank refinancing in 2012. This also reduced or neutralized the risk that European banks would stop lending with catastrophic consequences for the already fragile European economies.

As the Sovereign crisis is in many regards a crisis of confidence it could also be that many European mid size and small banks will take advantage of the carry trade and start buying European Government bonds more aggressively.

While this might not be sufficient in the long term if we combine this action with the long term debt reduction austerity measures undertaken by many Governments, like Italy, by restoring confidence in the market it could be helpful in leading to final resolution of the crisis in 2012.

End of the Crisis in 2012
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I see the end of the European crisis in 2012. This will happen after the first quarter that will remain volatile. This because Europe, due to their unique decision making structure, needs time to achieve fiscal unity. Thi...

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