European leaders learned their poker lessons. For weeks we have been listening to policy maker agonizing about the size and conditions of a bailout package. This weekend the tide turns. No more hand wringing about the size of the package, as the Eurozone moved from squeezing out 30 billion for Greece in protracted negotiations to providing a whopping $ trillion to countries in need (no details who qualifies and how). The money is to be raised by a "special purpose vehicle to be set up in the coming week." Sounds a bit like a European IMF, and much like the creation of a Eurobond to provides for the missing link in this monetary union: a centralized means to bail out member countries in need. Here are the details (via Calculated Risk):
1) The EU created a €60 billion fund based on article 122 (special circumstances). The IMF will add €30 billion. Press conference archive here (40 minutes)
2) The EU will create a Special Purpose Vehicle (SPV) for 3 years based on inter government agreements. These are potential loan guarantees backed by all Euro Zone countries. This is in addition to €60 billion and will be up to €440 billion – plus a contribution from the IMF up to half of European Union contribution (up to €220 billion). The total of the two is €750 billion.
3) There are apparently agreements from Portugal and Spain to take steps to reduce their deficits.
4) The European Central Bank (ECB) announced "interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional."
5) The Federal Reserve reopened swap lines to provide dollar liquidity.
Story Links: rom the NY Times: E.U. Details $957 Billion Rescue Package, the WSJ: World Races to Avert Crisis in Europe, Bloomberg: EU Crafts $962 Billion Show of Force to Halt Euro Crisis
Some where awed by the big number, but the real news is that the European Central Bank will start buying government debt and private bonds to avert the crisis. This is the very policy the head of the ECB denied even ever discussing only 2 business days ago. The bank announced that it would sterilise the interventions in order to prevent them from producing broader credit growth, so this is not an expansionary policy. But that sentence is just lip service. By all appearances, the 180 degree policy reversal will most certainly lead to assertions that the ECB's independence has been compromised. Here is Paul Krugman's customary cocky take "It now seems that [ECB president] Trichet has been dragged kicking and screaming into becoming at least a semi-Bernanke, engaging in much more expansionary policies than before. (Yes, the ECB says that they’re only liquidity operations, and will be sterilized, yada yada — we can only hope that they don’t really mean it.)"
