EU Launches Frantic Bazooka – Euro Gives Up Early Gains

posted by Nima

May 10, 2010 · Posted in Global Economics 

Europe Pulls Out Bazooka Part II in 3D

Since Euro countries are grappling with deficits, they are vowing to spend more money to fight the consequences of deficits, EU Crafts $962 Billion Show of Force to Halt Crisis:

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied.

Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.

“A very thick line has been drawn in the sand,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. and a former ECB official. “This is all in. What more could they have done?”

A 110 billion-euro bailout package for Greece approved last week by the EU and IMF failed to reassure investors, prompting yesterday’s renewed bid to bolster the euro.

How to Pay

“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” said Venkatraman Anantha- Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore.

The MSCI World Index climbed 2.6 percent to 1,128 at 12:15 p.m. in Brussels. Standard & Poor’s 500 Index futures rallied 4.4 percent. The euro appreciated 2 percent to $1.30. Crude-oil futures gained 3.4 percent.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.

ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.

‘Overwhelming Force’

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”

Merkel’s Meeting

As Merkel’s cabinet held a late-night meeting in Berlin on the euro rescue, her party unexpectedly lost control of Germany’s most populous state in a regional election, potentially costing her a majority in the upper house of the federal parliament.

Goaded by Germany, the ministers made a fresh commitment to closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.

The vow to push budget shortfalls below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011.

Can you imagine? Governments that have regularly broken commitments to cut deficits? Unthinkable!

One thing’s for sure, as I said over 1 year ago:

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

The Euro

What are foreign exchange markets saying? Here’s the Euro today:

euro

It rallied up as high as $1.31 on the announcement and has given up almost all those gains within a few hours already. This is volatility galore on the FX market!

This may be a result of frantic intervention on the part of the US, as the Federal Reserve opens credit line to Europe:

The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

The move comes after the European Union and International Monetary Fund pledged a nearly $1 trillion defense package for the embattled euro, hoping to calm jittery markets and halt attacks on the eurozone’s weakest members. The ECB also jumped into the bond market Sunday night, saying it is ready to buy eurozone bonds to shore up liquidity in “dysfunctional” markets.

The Fed’s action reopens a program put in place during the 2008 global financial crisis under which dollars are shipped overseas through the foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.

The Fed said action is being taken “in response to the reemergence of strains in U.S. dollar short-term funding markets in Europe,” and to prevent the spread of that strain to other markets and financial centers.

A so-called “swap” line with the Bank of Canada provides up to $30 billion. Figures weren’t provided for the other central banks. The arrangements are authorized through January 2011.

The debt crisis first erupted in Greece. Fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries. Eurozone ministers and the IMF this weekend approved a $140 billion rescue package of loans to Greece for the next three years to keep it from imploding.

The Fed had wound down these crisis-era programs with other central banks in February, along with other emergency programs to get lending flowing more freely again and return stability to financial markets. At that time, financial strains in the United States were easing, and the Fed began to take steps to move policy closer to normal.

It also had begun to lay out a plan to reel in the unprecedented stimulus money pumped out during the crisis. The Fed’s balance sheet ballooned to $2.3 trillion, more than double where it stood before the crisis struck. The program reopened on Sunday will expand the Fed’s balance sheet, economists say. However, the program poses little credit risk to the Fed because the arrangements are with other central banks, they added.

It is doubtful whether these currency swaps have ever accomplished anything but a very very short term relief.

We hear European bureaucrats rail against evil speculators who are daring to question the stability of the system. This is all repetitive nonsense which we can shrug off with a smile. I have said before that a truly meaningful reform of capital markets would require that governments remove themselves from the equation, rather than becoming the only factor in that equation:

what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies  to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above  and many more evils would automatically go with it.

So long as people don’t make these simple connections, they need not be surprised about the same problems popping up again and again, with the same short sighted responses protracting the problems again and again, choking our productive capacity until the system comes to a painful halt.

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