FRANKFURT (Dow Jones) – The finance ministers of the euro area and the European Central Bank (ECB) on the weekend a package of measures to stabilize the monetary union on track, the extent of observers has been received with surprise and on Monday in the financial markets at least temporarily the proposed reactions provoked. (Reuters photo:)
As the EU Economic and Monetary Affairs Commissioner Olli Rehn after more than twelve hours of negotiations told, decided to finance a credit line of up to 500 billion EUR for highly indebted countries, a further 250 billion EUR to the International Monetary Fund (IMF) may occur.
The EU assistance package consists of several parts: EUR 60 billion will come from the EU Commission, by regulation, they are directly available. The access to these funds is subject to similar strict conditions for loans as the IMF. Further EUR 440 billion € are the countries available in the form of guarantees for an emergency. Rehn said that it would do everything possible to secure the €, cost what it may. Europe had shown that night determination.
The reason was that the rescue package that had come to Greece in recent days, several more significantly in the markets under pressure. The next potential victims of speculation are Portugal and Spain. The ten-year bond spreads in these countries in response to the announcement of relief on Monday, however, very significantly below the stands on Friday showed.
Thus the ten-year Greek government bond yield spreads against government bonds fell by 490 basis points to 493 basis points. With the appropriate Portuguese and Spanish documents, spreads fell by 207 to 246 basis points and 54 basis points to 111. At the same time the rate on ten-year government bonds was reduced by 1.27 percentage points. The euro put to Friday at 3 cents to $ 1.30.
Flanking the efforts of the governments of measures taken by the ECB. This informed the morning that they wanted to launch a program for the purchase of private and public bonds on the secondary market. "The objective of this program is to eliminate the lack of functioning of securities markets and restore the proper functioning of monetary policy transmission mechanism," the ECB stated. About the extent of market intervention, the Governing Council will be decided. He wants to sterilize the purchases of securities to absorb the resulting liquidity. "This will ensure that the monetary policy stance is not affected."
Bundesbank and Banque de France confirmed on Monday morning that they had already begun with the purchase of government bonds, but gave no information regarding the volume and origin of the papers. According to the Association for Financial Markets in Europe (AFME) central banks bought the euro area government bonds Spain, Portugal, Greece, Italy and Ireland.
Commerzbank chief economist Joerg Kraemer believes that the proposed bond purchases by the ECB, the ultimate goal to stabilize state finances. The ECB awaken, although the impression of wanting to ensure primarily with their purchases, the functioning of markets, they could however be financed through purchases on the secondary and indirect budget deficits and thus to step in, if not the stabilization program of the EU should be enough, said Kramer, and warned: "The markets will pay attention to how the ECB defends its independence in this mishmash. "
Furthermore, the ECB will adopt certain elements of its policy of increased liquidity of banks again. To achieve this, on 12 May, a six-month term refinancing operation will be conducted with full allotment, which is paid to the average during the term of the ruling main refinancing rate. In addition, the two on 25 May and 30 June 2010 to be allocated to regular long-term refinancing operations with a three-month maturity as Festzinstender be carried out with Vollzuteilung.
Finally decided the most important central banks in the world and the U.S. Federal Reserve on Sunday night to resume rising again because of difficulties in the supply of dollar liquidity, its practice of dollar swap transactions. So will the ECB to provide liquidity in dollar repurchase agreements with maturities of seven and 84 days. The transactions are executed with the euro area as a normal security and Festzinstender with Vollzuteilung. The first of these transactions is on 11 May 2010 be implemented.
Economists expressed surprised by the extent of European aid package. "Overall, the package is bigger than the ‘Bazooka’ of the former U.S. Treasury Secretary Henry Paulson," ING economist Carsten Brzeski said, referring to the first U.S. support program in response to the financial crisis.
Commerzbank chief economist Kramer pointed out that Italy, Spain, Portugal and Ireland together until the end of 2011, a financing requirement of almost EUR 900 billion, had the composition of the expected budget shortfalls and the repayments. "The periphery countries are almost the end of 2011 does not rely on the capital market," he noted.
Citigroup economist Juergen Michels pointed out, however, that parts of the state aid program must be approved by national parliaments, which, however, particularly given the turnaround of the German Chancellor Angela Merkel (CDU) should not be a problem. Merkel said the Federal Cabinet would confirm the agreement in Brussels on Tuesday. For the confirmation by the Parliament to have more time.
However, the rescue package, according to Michels the peripheral countries helps not yet out of the vicious circle of fiscal savings and falling growth rates, which would hamper a return to a sustainable fiscal path. "We therefore maintain a high risk that the medium comes to debt restructuring in Portugal, Spain, Ireland and Greece," said Michels.
UniCredit chief economist Marco Annunziata sees the euro-zone countries face the task of placing bonds of up to 500 billion EUR in the market should be the stabilization fund actually used. The fascinating thing was that they would have to get this money by the same speculators who had supposedly just been organized and ruthless as a pack of wolves "trying to sink the euro zone, he noted, referring to the corresponding statements of European politicians.
By Hans-Bentzien, Dow Jones Newswires, +49 (0) 69 29 725 300
Hans.Bentzien @ dowjones.com
(Using of contributions by Adam Cohen and Geoffrey T. Smith)
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