Analysts’ View: EU sets 750 billion euro emergency fund

SINGAPORE (BestGrowthStock) – The European Union agreed on an emergency loan package on Monday that with IMF support could reach 750 billion euro ($1 trillion) to prevent a sovereign debt crisis from spreading through the euro zone.

The European Central Bank also said it would buy euro zone government and private debt, what markets have called its financial “nuclear option,” abandoning resistance to full-scale bond purchases in light of the region’s crisis.

The euro rose and stocks jumped as EU finance ministers settled on what they hoped would be a package big enough to prevent Greece’s crisis from spreading and stave off any threat to the global economic recovery.

The package offers a mix of loans and loan guarantees.

To help ease strains caused by the euro zone crisis and prevent a credit crunch like that in 2008, major central banks reopened currency swap facilities to ensure market liquidity.

For the latest news, click; for more on the market impact of the deal see.

Following are analysts’ comment on the emergency fund and whether it will be enough to pour cold water on the growing debt crisis in Europe and restore market confidence.

JAMES NIXON, ECONOMIST, SOCIETE GENERALE, LONDON

“The center piece of the deal is a 440 bln euro lending facility that can be drawn upon by sovereigns who find themselves unable to fund themselves in the market. This will be funded via a special purpose vehicle guaranteed by member governments and not apparently by the sort of bilateral loans used for Greece.

“The decision to ask the ECB to intervene in the government bond market is very significant. One of the largest weaknesses of the rescue package for Greece was that the liquidity facility very quickly “crowded out” demand for Greek government bonds (because the market would rather have the EU take risk of a possible Greek restructuring). If the ECB steps in a buyer of weaker peripheral debt then this will no longer be a problem and will effectively set a ceiling for bond yields.”

HIGH FREQUENCY ECONOMICS, RESEARCH NOTE

“The package is still too vague to understand. We believe that lending more money to already overborrowed governments does not solve their problems. Had we any Greek bonds in our portfolio, we would not feel rescued this morning.

“You cannot make a bankrupt company solvent by lending it more money. Similarly, you cannot make a nation that is incapable of servicing its debt more creditworthy by extending it more credit. The process of bridging Greece’s financing gap through EU borrowing puts a double whammy on (euro zone) debt and deficit ratios without solving the underlying problem.

“We are again at risk of a seize-up (in credit markets if banks refuse to lend to each other), but we are hopeful that the emergency actions announced by the ECB may help ease the consequences of such illiquidities.”

ROYAL BANK OF SCOTLAND, RESEARCH NOTE

“We have been arguing that the most powerful option for the ECB to support the periphery was to push the nuclear button.

“Today Europe has displayed a strong show of solidarity. This appears to be a major backstop facility for euro area sovereigns and will provide ample breathing space for sovereigns to implement fiscal consolidation measures. No doubt the IMF exercised strong pressure on Europe to act decisively to protect the nascent economic recovery.

“The ECB intervention is probably the most significant part of the deal … the purchase of private and public sector assets was probably the most difficult part to accept on this deal. This sets a precedent for the rest of the life of the Central Bank.

“While the ECB’s intervention might attract bad press regarding its mandate and independence, we believe that this was necessary to short circuit the negative feedback loop which was getting more and more threatening for the global economy.

“Sceptics will probably argue that this does not solve the medium term debt overhang issues plaguing the periphery. However they won’t deny that this will give them a chance to implement some fiscal consolidation plans to restore market confidence in the sustainability of public finances in the euro area.”

RORY ROBERSTON, RATE STRATEGIST, MACQUARIE, SYDNEY

“The ECB says it will ‘sterilize the impact of the above interventions’, so it’s still pretending its monetary-policy settings are just right. Nevertheless, the ECB looks to have started down the path of the Fed, the BOJ and the BOE in pursuing unconventional policies widely referred to as quantitative easing.”

ANDREW RICHMAN, FIXED INCOME STRATEGIST, SUNTRUST PRIVATE WEALTH MANAGEMENT, FLORIDA

“This is a strong show of support. Treasuries will sell off on the news. The big question is longer term carry through, and will weaker southern countries follow through on the austere cutbacks (in spending).”

HIDEKI HAYASHI, GLOBAL ECONOMIST, MIZUHO SECURITIES, TOKYO

“For the short term, the array of aid plans appear effective. But in the longer run the plans may become a heavy burden for the euro zone.

“The cost of reviving Greece will not be cheap and this may weigh on the euro. The question is how to fund the measures. The zone as a whole will have to procure money for countries like Greece which can no longer secure funds at a reasonable cost.”

FRANCES CHEUNG, SR STRATEGIST, CREDIT AGRICOLE, HONG KONG

“In the longer term, uncertainty still remains. I guess it really depends on the execution and the implementation in the sense that Greece has to resort to very strict austerity measures, so we have to see how these plans play out. But these plans do mean the contagion risk is lower now.”

DARIUSZ KOWALCZYK, CHIEF INVESTMENT STRATEGIST, SJS MARKETS

“These measures are a game changer in the near to medium term. A total of 750 billion euro for governments to borrow is large enough to deter speculation in the short term about a default. The ECB’s plan to buy in the secondary market is also a huge step. European Bond markets will recover sharply in the short to medium term and the same will happen to global risky assets — equities, commodities, emerging market assets as well as corporate debt. But the euro will continue to fall because there will be more liquidity provided by ECB and ECB assets will deteriorate as the bank purchases lower quality debt issued by European governments.

TONY MORRISS, MARKET STRATEGIST, ANZ, SYDNEY

“These measures seem to be working in the short term with risk-on trades back and stock markets all rising. The EU leaders appear to recognize that there are strains in their project and they are moving to address them.

“Getting them to agree on a number is crucial, but to me what appears more important is the establishment of swap lines and quantitative easing. And while QE may weigh in the longer term, the euro seems to be stabilizing, at least in the near term.”

Stock Market Research

Analysts’ View: EU sets 750 billion euro emergency fund