The nuclear option for financial crises
They finally realised how serious it was. With stock markets tumbling, bond yields on vulnerable debt blowing out and the euro in danger of failing its first big stress test, the European Union and International Monetary Fund came out with a huge rescue plan.
At 750 billion euros (500 billion from the EU; 250 billion from the IMF), the rescue package is the equivalent of taking a huge mallet to a loose tent peg. Add to that an agreement among central banks to help out and the actual purchase of euro zone bonds by Europe’s central banks and you turn the mallet into a pile driver.
That tent is not going anywhere for now.
Does this remind anyone of anything? How about a lot of small attempts to stop the subprime/Lehman crisis failing, only to be followed by the likes of the $700 billion Troubled Asset Relief Program in the United States?
Is the message here that markets are no longer going to respond to small, incremental attempts to stop crises building and that what they expect now is the nuclear option?