The EU have learned that too little to late does not work with the markets. Yesterday they announced a total package of around 800bn€ in credit lines for Eurozone countries with 80bn coming from the whole EU and the 720bn solely from the Eurozone countries. As significant, a commitment by the ECB to buy Eurozone debt in a sterilized manner plus an agreement by the major central banks to reinstitute currency swaps to help banks with liquidity difficulties in particular currencies mainly the dollar. These had been brought in during the credit crisis and central banks have been trying to run them off for the last year. The devil as always is in the detail so I note a few possible problems below.
First the UK contribution will be 10bn € to a stabilisation fund, a sort of EU IMF. This is not necessarily a bad deal for the UK as we may well have need to draw on this fund shortly! Detail is woefully short on how the lion's share will come from the Eurozone countries and I suspect problems will materialise there.
The sterilized purchase of PIGS bonds by the EU will be targeted at particular parts of the yield curve eg 2 year Greeks where rates hit 40% last week and there was no market in these bonds. The ECB action will fix that. To sterlize the rise in the Euro supply caused by these purchases the ECB will sell other bonds it holds into the market and hence drain the excess Euro liquidity created by the purchase. I opine that it will be German, French and Dutch bonds that are sold and possibly not at the two sector of the curve. There is also the worry that if the Greeks are not good boys, or in economist speak tackle their structural deficit, the ECB will be left with a lot of expensive toilet paper in its loos.
The currency swaps are straightforward in principle but will come under closer legislative and regulatory scrutiny than happened 2 years ago. Politician have learned not to trust banks, even central banks.
Will it work? Well in the short term, less than 6 months, Yes. The markets have responded favourably this morning. The FTSE is up almost 4% and the Euro is up at 1.307 against the $. Far East equity markets are also up. Ten year bond spreads have shrunk to 7% + for Greeks. Still high, a 4% spread to Bunds, but has come in from the 15% plus when I wrote my first version this morning. The bond market takes a longer view and are more rational than speculative equity markets. I believe the bond markets. The Eurozone is nowhere near out of the woods. The PIGS structural deficits need to be tackled and that will take a long time and a lot of pain for national politicians and their electorate.
The real problems will come over the next 6 months on the political front. Greek civil unrest will continue at probably a reduced level over the tourist season but will ignite when the tourist jobs on the islands disappear in September and the unemployed return to the big Greek cities like Athens and Salonika.
Dr Frau Merkel will also be facing political problems in Germany. Her centre right coalition was heavily defeated in yesterday's Ruhr Westphalia local elections and Merkel lost control of the German upper house. German money going to idle Greeks was a big factor in her defeat. Portugal and Spain are in the same category as Greece, OK until the tourists go home and there will be fewer of them this year than last - Turkey is the Med destination of choice this year.
Most worrying for the UK is not the Cameron Clegg Brown fandango but the motion going through the European parliament today to increase regulation on hedge funds and private equity. Why don't they just ask them to go to Zurich, New York or the Caymans? That is how it will end up.
For my take on how to exploit a hung parliament to get out of the EU click below