Waiting for details on the trillion-dollar rescue
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It’s not all that easy to tell, but it looks very much as though most of today’s market rally is a function of the ECB deciding that it can start buying bonds in the secondary market after all. The trillion-dollar announcement from the EU looks big and grand, but ultimately is so vague that few market participants would place much stock in it.
If you have 16 central banks all announcing that they will buy both government and private debt, that’s going to provide a one-day boost to markets, which are going to price in all that future demand. But if all that yesterday’s announcements achieved was a one-day rise in stocks and bonds, that counts as failure. What’s important is that markets are so impressed by the trillion-dollar fund side of things that they don’t even bother selling the debt of countries like Spain and Portugal, since they know that a solid safety net exists.
That’s not going to happen. Just like Hank Paulson’s TARP bazooka had to be pulled out and used, the markets are going to push the Eurozone periphery to a point at which the new bailout mechanism needs to be activated. And right now, nobody knows how or whether that mechanism is going to work. Does it need to be ratified by every individual country which is providing a guarantee? How cheaply will the SPV be able to borrow? Will it just borrow at floating rates overnight while lending at three-year terms, thereby essentially becoming a bank? How much faith will the markets place in the fragmented set of guarantees which is meant to reassure lenders to the SPV that they will be paid back in full? If one country fails to make its pro-rated payment, what happens then? Does the SPV have seniority over private-sector bondholders and even bilateral lenders in the way that the IMF does? Can any of this work in the absence of a formal international treaty setting it up? There are simply too many questions and too many uncertainties for anybody to be reassured at this point that the eurozone’s fiscal problems have found even an intermediate-term solution.
Well done to the ECB, then, for saving the day — at the cost of its own independence. Let’s hope that it saves at least the rest of the year as well. Otherwise the cost was surely too much of a price to pay.
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The EUR is back to where it was on Friday against the USD. One day wonder?
Well aren’t we snarky today. I quite like Ambrose Evans-Pritchart’s interpretation of today’s events where the EU’s actions have brought into force a EU-Treasury by stealth http://www.telegraph.co.uk/finance/finan cetopics/financialcrisis/7702335/Europe- prepares-nuclear-response-to-save-moneta ry-union.html
While you raise some important questions on how these mechanisms are supposed to work, the EU leaders performed a Herculean task to even get an agreement by Sunday night. I think they should be given at least a few days credit before having all the details worked out.
They bailed out the core banks lenders in the UE, or rather the threat of a possible stealth bailout, watch out market participants! Ha. They bought some time for the big European lenders to consider two painful outcomes. Let’s see which they chose. But, lets not mince words, all they did was prop up the core banks who made bad loans. The bonuses and paychecks for this fine disservice can keep coming a little longer.
Marshal, yes, it appears to be a one-day wonder. The Euro’s death has been delayed a little. I see no structural differences in the problem between Friday and Monday. It costs 1 Trillion to buy enough time for an EXIT.
If it takes a trillion dollars to solve the Greek crisis, how much will it cost if one of the other PIGS starts heading for default? Or is this supposed to be all inclusive.
The European Union as a cohesive unit is a flawed concept. The so-called “United States of Europe” would require a true federal constitution, with each nation subordinating their sovereignty to Brussels. That is never going to happen.
But, if it keeps the French from going to war with their neighbors, that’s a good thing I guess. Laugh if you will, but name a century where the French were not in at least one war with one of their neighbors.
The better solution would have been to tell Greece they have failed to meet their obligations as members of the EU, they have 2 years to clean up their act, or they are out on their own, and back to the Drachma.
You all strike me as intelligent fellows, but I think you’re missing the point with respect to this EU bailout. Essentially, this represents an acknowledgement that the crisis, nearly out of hand, must be gotten under control, at any price. So this $1 trillion is a statement of resolve among the member states of the EU that the price of the crisis will be shared among the member states and amortized into the future, rather than paid in a series of lump sums by the profilgate PIIGS.
In practical terms, Felix is right, the resolve alone is a one-day wonder. It will take a series of further steps to assure the market that words will lead to deeds, just as it took Congressional ratification of TARP, followed by repeated assurances of low interest rates from the Fed, coupled with an ongoing program of debt repurchase agreements, starting with $300 billion in long-dated treasuries, and continuing with $300 billion in mortgage debt purchases added to the Fed balance sheet, on top of the Congressional blank-check written to Fannie Mae and Freddie Mac.
In short, this move by the European Union should be taken as just what it is: a good start, but only one step down the road toward a complete solution.