European Debt Crisis bring fear to the financial markets, The European Central Bank is creating a 750 billion bailout fund to prevent and protect countries facing economic ruin. From the Financial Times:
Global authorities have announced audacious coordinated action to combat escalating financial market tensions triggered by worldwide fears over public finances.
The European Central Bank announced early Monday morning it would intervene in government bond markets and join the US Federal Reserve and other main central banks in reactivating extra US dollar liquidity facilities.
Just minutes earlier, the European Union and the International Monetary Fund had agreed an emergency funding facility worth as much as €720bn ($930bn, £625bn) in loan guarantees and credits to stabilise the eurozone.
“This is shock and awe part II and in 3-D, with a much bigger budget and a more impressive array of special effects,” said Marco Annunziata, chief economist at Unicredit.
The reaction so far is favorable:
Initial reaction to news of the package in Asia trading Monday morning was favourable, with the euro gaining almost 2 per cent against the US dollar and 3 per cent against the yen. In Japan, the Nikkei average rose 1.3 per cent and Hong Kong’s Hang Seng advanced 1.2 per cent to 20,154.07.
The bailout is an about-face by the ECB which want noting to do with bailout out trouble economies:
The ECB’s decision to buy government and private assets to ease market tensions marked a dramatic backdown by the Frankfurt-based institution. It had previously opposed measures which blurred the boundary between fiscal and monetary policy. No limits were set on the level of purchases but the ECB said the objective was to “address the malfunctioning of securities” rather than to help governments.
The purchases would be “sterilised” with the extra liquidity reabsorbed to prevent inflation risks. The ECB will also reintroduce unlimited offers of three- and six-month liquidity.
Meanwhile, the stabilisation scheme agreed by EU finance ministers and top officials after 12 hours of talks in Brussels consists of government-backed loan guarantees and bilateral loans worth up to €440bn ($568bn) provided by eurozone members; a further €60bn supported by all EU members through expansion of an existing balance of payments facility; and up to €220bn provided by the IMF.
Erik Nielsen, chief European economist at Goldman Sachs, said the outlines of the package were impressive.
“In any comparison, in terms of financing needs in southern Europe, this is a substantial amount,” he said.
Financial Times has the rest of the story.