$962bn euro-bailout to calm financial markets but for how long?
Posted on 10 May 2010 with 3 comments from readers
European policy makers have rolled out an unprecedented $962 billion loan package and a program of bond purchases, encouraged by US President Obama as they rally a global effort to halt the sovereign-debt crisis enveloping the euro.
Details are not yet available about the bond market intervention. But last week’s slide in the euro, and widening bond spreads in Spain and Portugal has brought the huge financial package worth almost a trillion dollars.
ECB bond purchases
The European Central Bank is to announce later how it intends to counter ’severe tensions’ in ‘certain’ markets by purchasing government and private debt, according to Bloomberg. Asian stock markets ticked up and stabilized and the euro rose on the news.
But it is not certain how far markets will respond. In particular the confidence in the bull market rally in the US may have been seriously damaged by the events of last week, especially Thursday’s intra-day plunge of almost 1,000 points on the Dow, the biggest fall since 1987.
Markets will also be turning their attention to non-euro Britain this morning where the Conservative and Liberal Democrats are locked in coalition negotiations. Political instability is not normally given a chance to sort itself out and the market reaction is likely to be strong, even if some kind of joint statement is made by the parties.
Euro fix
Whether Europe has really sorted out its problems or just delayed its day of reckoning will also be called into question. There will be an increasing concern that government intervention will be inflationary, and that sets the euro zone up for higher and not lower interest rates.
Governments have a huge capacity to intervene but a poor record on wealth creation. If governments could really make people rich then the world would have wished its economic problems away many decades ago.
Unfortunately harsh realities about debt and what it means for future economic growth still have to be faced. That suggests that any market relief today is more of a selling than a buying opportunity and that does not bode well for a sustained resumption of the US rally in stock markets. Markets were already way ahead of reality and a pull back inevitable.
3 Comments posted by readers:
US futures are up like 300 points as of now. I am wondering how that gap between Friday’s close and 300 is going to get filled. With this Bailout package I think the markets will do quite well for the time being unless some other country announces that they are going to go bankrupt lol..
When the US received a package similar to this in size the US market rallied for about a whole year. We now have a bailout package similar in size for Greece. This will do Europe well provided no other country pops up needing a bailout package.
hmmm, sounds to me that stock markets are going up,, cuz where do u think all that cash is going to go too,,,
and also this cash is going to keep interest rates low for bonds,,,
but can they manipulate the price of gold and silver??
short run – bull stock market
long run – gold and inflation
I just read online that this European bailout package that they put together was big enough to cover 3 countries that may need it. With this is mind we could see one big bull run this year.
European Rescue Could Work: Nouriel Roubini
The size of the rescue package agreed at the weekend by European Union countries and the IMF is likely to cover the borrowing needs of vulnerable euro zone countries, according to famous economist Nouriel Roubini.
“Assuming hypothetically that the total financing needs for Portugal, Ireland and Spain were to be covered until 2012, the size of the package would need to be about 600 billion euros,” Roubini, together with a team of economists, wrote on his web site RGE Monitor.
Roubini, dubbed Dr. Doom by the media but Dr. Realist by a poll of CNBC.com readers, had been predicting for weeks before the bailout that the Greek crisis was just the tip of the iceberg.
But at the weekend the EU surpassed markets’ expectations by unveiling a 750 billion euro ($945 billion) emergency rescue package to help stabilize markets and prevent the break-up of the euro.
The aid package was initially reported to be around 720 billion euros with the IMF’s contribution at 220 billion euros, but the final IMF contribution will be 250 billion euros, which brings the total to 750 billion euros.
The remaining 500 billion euros will be contributed by the EU.
Roubini believes the sheer size of the rescue package will therefore halt the threat of contagion.