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European war against the markets - 750 bn EUR

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(10 May 2010) With an unprecedented rescue package of up to 750 billion euros by the EU and International Monetary Fund to stabilize the ailing single currency, the euro. The goal: tame speculators. Is it enough? Well, if something the following this happens today, then you know for sure that Europe is rushing into its worst crisis since WWII:

  • Greek bond yields sky-rocketing
  • Stock markets continue to fall
  • Private investors liquidate their SICAVs
  • Euro still dropping

What was meant to be a two-hour meeting of finance ministers turned into an 11-hour negotiation. Under the aid plan, the European Commission would make 60bn euros available to support member states experiencing "difficulties caused by exceptional circumstances beyond their control".

Ms Salgado, Spanish Finance Minister, said eurozone member states would "complement such resources through a Special Purpose Vehicle", known as the European Financial Stabilisation Mechanism, or the Crisis Slush Fund, and worth 440bn euros, which they would guarantee on a pro-rota basis over a period of three years. According to Sueddeutsche.de, Germany have to guarantee 123bn euros.

The IMF will contribute an additional sum of at least half of the EU's contribution to the SPV - a total of 250bn euros.

In the package, there is also a deal with Spain and Portugal, where they promise to present even more spending cut measures to the other EU countries by the 18 May 2010.

Who will operate the Crisis Slush Fund? Will it shuffle between the Heads of State, the European Commission and the ECB?

The total banking sector asset exposure to the PIIGS are even bigger: at least 3,200bn euros! So there is no absolute truth about the figure 750bn euros, it's just a measure to convince the markets that the EU will do whatever it takes to protect its political construct, the euro. The sums pledged are huge - enough to support the borrowing of several eurozone countries for a couple of years. And central banks around the world have launched what look like co-ordinated actions to assist financial stability. So far, market reaction has been positive.

Central banks around the world on Sunday night announced that they would restore currency swap agreements that were introduced during the financial crisis, in an attempt to ease the strain on banks caused by the European sovereign debt crisis. The currency swap facilities are intended to make it easier for European banks under pressure to access funding in dollars. “These facilities are designed to help improve liquidity conditions in US dollar funding markets and to prevent the spread of strains to other markets and financial centres,” the Fed said in a release. “Central banks will continue to work together closely as needed to address pressures in funding markets.”

The European Central Bank will buy euro zone government bonds to help support fractured markets, abandoning resistance to full-scale asset purchases in light of Greece's debt crisis. The ECB said in a statement that the step, dubbed the 'nuclear option' by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts. The scope of the purchases was yet to be determined, but the ECB said they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected. "The European Central Bank decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term," it said in a statement just after European Union finance ministers announced their own 500 billion euro crisis package. The fact that the bond purchases will be offset by liquidity absorbing operations means they will not have the same potential impact on inflation as straight purchases, such as those undertaken by the U.S. Federal Reserve and the Bank of England. In its early-morning statement, the ECB said it would also re-start dollar lending operations and bring back some of the emergency liquidity measures it had started to phase out.

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