\n\tBy Greg Peel<\/p>\n
\n\tThe Dow closed up 140 points or 1.3% while the S&P gained 1.4% to 1188 and the Nasdaq<\/span> added 1.6%.<\/p>\n \n\tWhen will anyone ever learn? So slow are ratings agencies to catch up with what's going on around them that we cannot even be sure Moody's downgrading yesterday of the ratings of Societe<\/span> Generale<\/span> and Credit Agricole<\/span> – two of France's largest banks – was not related to the Second World War. And Moody's in particular has a reputation of being the slowest of the three major agencies, but then again that's like being the fattest bloke on The Biggest Loser.<\/p>\n \n\tAsk yourself: why is the Australian stock market down 20% from its April high? Might the answer have anything to do with Europe? Perhaps Greece, and its possibility of default, might be part of that? And who, as we have long known, holds a lot of Greek sovereign debt? Oh yes – the French banks.<\/p>\n \n\tLet's take SocGen<\/span> for one. Since March its share price has fallen 72%. It is a truth universally acknowledged that SocGen<\/span> will need an injection of capital in order to survive any restructuring of eurozone<\/span> sovereign debt – haircuts or default, orderly or disorderly. Yet now, and only now, have the Moody's analysts realised<\/span> perhaps SocGen's<\/span> credit isn't quite as good as it was. Brilliant! Next they be telling us Enron's looking dodgy. <\/p>\n \n\tWhy anyone would sell down the Australian market sharply on the announcement of a discredited US ratings agency downgrading a bank or two in France is thus anyone's guess, but then the current market is all about jumping at shadows. The funny thing is that after the close of the Asian session yesterday, when the northern hemisphere sat down to enjoy the next instalment<\/span> of In Europe Tonight, the producers had cut that bit out of the script. It certainly happened, but wasn't deemed important to the plot. SocGen<\/span> shares traded higher from the bell, as did Credit Agricole<\/span> shares.<\/p>\n \n\tIndeed France's CAC<\/span> stock index closed up 1.9% on the session, and Germany's DAX – and don't forget German banks also hold loads of toxic eurozone<\/span> debt and may well be next in Moody's sights – leapt 3.4%. Oh and shucks, the overnight ASX<\/span> 200 futures are up 1.8%.<\/p>\n \n\tI had noted in yesterday's Report that Merkel and Sarkozy<\/span> were due to make an announcement last night regarding the Greek situation once they had spoken to Prime Minister Papandreou<\/span>. It might be safe to assume that while Merkozy<\/span> weren't yet entirely sure what they were going to say, they weren't going to say “too hard, we give up”. Electing to sell ahead of that announcement was always going to be somewhat of a risk. And it's proved to be so.<\/p>\n \n\tThe upshot is that Greece does not want to leave the eurozone<\/span>, and neither France nor Germany want Greece to leave either. Greece will stay in no matter what happens, even if the only option is default. And that option is getting close to being a given. Greece will get its next E8bn<\/span> bail-out tranche<\/span> at the end of the month ahead of all member parliaments voting on the EFSF<\/span>, which will take another month. Once the EFSF<\/span> is in place it is assumed, albeit not confirmed, that an “orderly” default of Greek debt will follow.<\/p>\n \n\tMerkozy<\/span> nevertheless had stern words for Papandreou<\/span>, insisting that austerity and asset sale targets must be met or he'll be right back in the Naughty Chair. A contrite Papandreou<\/span> said that it would be so.<\/p>\n \n\tThat news was enough to send European stock markets rallying and Wall Street following through. There was a brief stumble early in the New York session when it was thought Austria had just voted against the EFSF<\/span>, but it turned out that Austria had merely delayed the vote. On that misinterpretation the Dow was briefly down 100 points, but it soon reversed and rallied and by 3.30pm<\/span> was up 280 points. Volume was light, and short-covering evident, so the last half hour saw a fall-back on profit-taking. Either way, the world did not end last night. And there's more to the story than just the Merkozy<\/span> announcement.<\/p>\n \n\tSpeaking at a conference early in the session last night, US Treasury secretary Timothy Geithner<\/span> said, emphatically, there was “no chance” of financial failure in Europe, a la Lehman. Geithner<\/span> is off to Warsaw tomorrow to attend the scheduled regular meeting of the EU finance ministers, and it hasn't been lost on Wall Street that this is the first time America has been included in what is normally a Euro-only membership. Why now? Could it be, perhaps, that it was then New York Fed President Geithner<\/span> who, in 2008, was instrumental in orchestrating the TARP – the near US$1 trillion package used to recapitalise<\/span> all of America's major banks?<\/p>\n \n\tFunny that Larry Fink, BlackRock<\/span> CEO and adviser to Europe should also happen to suggest, at the same conference Geithner<\/span> attended last night, that what Europe's now needs is a TARP. The bottom line is that Wall Street rallied last night because everyone knows something decisive has to be done in Europe this time – no more muddling through, bickering and procrastinating – and the obvious answer is to stop trying to prop up the sovereigns to save the banks but to prop up the banks instead and then let the sovereigns deal with it. It ain't rocket surgery.<\/p>\n