Sunday, May 9, 2010

Will Europe's Show of Force Stem the Slide?

Bloomberg reports, EU Crafts $962 Billion Show of Force to Support Euro, Halt Global Crisis:

European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.

Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.

The ECB will also embark on “very significant operations,” European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels after the 14-hour meeting. “The ECB has taken a decision to intervene in the secondary markets of government securities.”

Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that the show of financial force would prevent a sovereign-debt crisis and muffle speculation that the 11-year-old euro might break apart.

Europe’s failure to contain Greece’s fiscal crisis triggered a 4.1 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. It prompted President Barack Obama to call German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday to urge “resolute steps” in Europe to prevent the crisis from cascading around the world.

Under the loan package, euro-area governments pledged to make 440 billion euros available, with 60 billion euros more from the EU’s budget and as much as 250 billion euros from the International Monetary Fund, said Spanish Economy Minister Elena Salgado.

“We are placing considerable sums in the interests of stability in Europe,” Salgado told reporters after chairing the meeting.

In my last comment, I said European leaders will do whatever it takes to shore up the financial system and avoid debt deflation. With this move, they're sending a strong signal that they will do whatever it takes to support the EMU, and curb any speculative attacks on the euro and European sovereign debt.

Following the announcement, the Euro, stocks and Greek bonds are surging and default swaps are plummeting. In my opinion, European leaders didn't have a choice. Heavy speculative attacks were threatening their bank funding system, and had they done nothing, a run on banks was inevitable.

As for Greece, the WSJ reports that the IMF approved its rescue package, and urged against debt default. Finally, the FT reports that Barroso fires salvo at markets:

José Manuel Barroso, European Commission president, yesterday said he would propose placing credit rating agencies under the direct supervision of a European securities markets authority, writes Tony Barber in Brussels .

Speaking to the European parliament, Mr Barroso said: "Financial market players are still in business because regulatory authorities and democratic institutions - ultimately, the taxpayers - stabilised the markets in the financial crisis.

"We acted swiftly then, and precisely for that reason, we will also act swiftly if further regulation is required."

Mr Barroso's reference to democratic institutions under siege underlined the extreme seriousness with which European Union policymakers have begun to view the accumulating risks to the eurozone's stability.

The 16-nation area's public debt is expected to rise to 88.5 per cent of gross domestic product next year, a record in the euro's 11-year history, the Commission estimated.

Mr Barroso reserved his strongest language for credit rating agencies. *François Fillon, French premier, last night said speculators would fail in any assault on the euro, writes Peggy Hollinger in Paris .

In a televised interview on TF1, the prime minister acknowledged that both Greece and the euro had been suffering from a speculative attack "for several weeks, which has in recent days intensified". But he said the attack would fail because "the eurozone is solid. Contrary to popular thinking, the eurozone is less indebted than any of the big global zones".

Listen carefully to President Barroso below. The message to speculators is clear: you no longer have free reign to mount destructive speculative attacks on European sovereign debt or the Euro.

Even though it's late, Europe's show of force is resolute and decisive. In my opinion, this will have a profound impact on markets, helping shore up confidence and it will stem the slide to deflationary depression.

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