Fisher Investments Editorial Staff
Developed Markets, Investor Sentiment, Market Risks

C’est Un Bazooka

By, 05/11/2010

Story Highlights:

  • The EU agreed to a hefty €750 billion (~$955 billion) rescue package consisting of loans and guarantees to rescue eurozone economies needing financial assistance—expanding last week's €110 billion Greek bailout.
  • Additionally, the ECB announced four new measures to help bolster liquidity, including purchasing public and private sector securities on secondary markets and reopening a currency swap line with the US Fed.
  • Markets around the world reacted positively to the news, and Greek bond yields fell.
  • Judging by investors' reactions, the aid package should help alleviate some uncertainties over the PIIGS countries' near-term funding abilities—uncertainties which seemed to have impacted markets all year.

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Whether fat fingers or a big fat mounting Greek problem precipitated the sharp market pullback late last week, the extent of the sell-off showed investors were clearly spooked over events in Europe. The European Central Bank (ECB) and European leaders were quick to act and, calling to mind ex-US Treasury Secretary Hank Paulson's "bazookanomics," the EU agreed to a hefty €750 billion (~$955 billion) rescue package consisting of loans and guarantees to rescue eurozone economies needing financial assistance—expanding last week's €110 billion Greek bailout. The bazooka, it'd appear, is locked and loaded in Europe. 

The sizeable package announced Sunday now includes €440 billion of loans from eurozone governments (again requiring national government approval), a €60 billion increase in the European Commission (EC) Balance of Payments (BoP) lending facility (an EU emergency fund with a previous limit of €50 billion), and €250 billion from the International Monetary Fund (IMF) (additional €220 billion on top of the already promised €30 billion).  

Additionally, the ECB announced four new measures to help bolster liquidity. (ECB President Trichet's failure to mention such measures last week was widely seen as a major contributor to market-roiling jitters.) The central bank will purchase public and private sector securities on secondary markets, reinstate unlimited fixed-rate offerings of three- and six-month loans, and reactivate a currency swap line with the US Fed to ensure US dollar availability at a fixed rate. The Fed also reopened swap lines with the Bank of England, the Swiss National Bank, the Bank of Canada, and Bank of Japan to help maintain liquidity in US dollar funding markets globally. 

Like Paulson, the EU and ECB wanted to send a powerful and aggressive message to markets, but unlike in the US where liquidity froze before the trigger was pulled, it would seem European leaders chose to act preemptively. Markets around the world reacted positively to the news—for Monday, the S&P 500 gained 4.40%, the German DAX was up 5.30%, the French CAC 40 climbed 9.66%, and the British FTSE 100 rose 5.16%. The three-month US dollar Libor, or the interest rate banks charge each other, fell for the first time in a month, and 10-year Greek bond yields declined  by 3.92% while 2-year notes saw yields fall more than 10%. 

Judging by investors' reactions, the aid package should help alleviate some uncertainties over the PIIGS countries' near-term funding abilities—uncertainties which seemed to have impacted markets all year. Once the smoke from the bazooka clears, the EU may have to contend with questions over eurozone viability and perhaps face increased pressure on the euro. However, those are battles for another day and today's victory is the focus now. How successful the rescue package proves remains to be seen, but the surge in markets Monday shows some regained confidence.  

The large positive swing also shows volatility can spike wildly both ways, which is why panicking and trying to maneuver around big sudden drops—rather than being patient—can be fruitless if not downright harmful to long-term investing objectives.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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