Unprecedented is often used for huge deals or surprise switches in policy.
Some times it’s over used. Yesterday’s announcements from the eurozone, EC, European Central Bank and the US Federal Reserve were unprecedented in both size and scope, and it wasn’t a cliché.
The big guns were being brought out to make an unprecedented set of announcements about an unprecedented situation.
After hours of negotiations, especially with Germany and the UK, we saw a support package of at least 500 billion euros of support from European Union countries.
And that will be boosted towards 720 billion with the IMF contributing up to 220 billion euros of additional support.
That’s more than $A1 trillion (almost the entire annual GDP of the Australian economy).
The news saw gold, oil and shares rise. The euro firmed against the US dollar, but then fell back, as did the Australian dollar.
The surge continues into Europe, then the US. A massive relief rally. Gold fell, oil rose.
The news helped Australian shares to end their recent falls and end higher by around 2.5%, a big rebound.
The European Union and the International Monetary Fund agreed to the emergency funding facility in loan guarantees and credits to stabilise the eurozone, after a weekend of non-top talks that also involved the US Federal Reserve, the Bank of England and the Swiss central bank.
It is the biggest and most complex international rescue and support scheme put in place.
The surprise though was the European Central Bank which announced that it will intervene in government bond markets and join the US Federal Reserve and other main central banks in reactivating extra US dollar liquidity facilities. These were used during the 2007-09 credit crunch.
All reports said the European Central Bank would make an announcement soon on the level and type of support it will provide, and it did.
The ECB said it will intervene in government and private bond markets as part of the eurozone/EC support. It will therefore be buying private as well as government bonds and securities.
“The Governing Council decided to conduct interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional,” the Frankfurt-based central bank said in its statement. “The scope of the interventions will be determined by the Governing Council.”
That started overnight with yields on Greek debt falling.
The swaps with the ECB, Bank of England, the Bank of Japan and Swiss central bank will allow them to provide the “full allotment” of U.S. dollars as needed, the Fed said in a statement in Washington.
There will be a separate swap line with the Bank of Canada which will support as much as $US30 billion. The swaps are initially authorised to run to January 2011.
The ECB said it will sterilise the purchases and announced it will hold additional longer term operations at three- and six-month maturities.
It’s called quantitative easing, which really described unconventional approaches to supporting financial markets and economies.
Even the UK will chip in around 13 billion at most, even though it’s not in the euro.
That would have been one of the final decisions of the Brown Labour Government, but would have needed the approval of the Conservatives and the Lib Democrats who look like reaching agreement on some sort of power sharing over the next day or so.
The European agreement came 9 hours late and was impacted by the results of a regional election in Germany which saw the ruling coalition of Chancellor Angela Merkel defeated.
There is a driver to this wrangling. Just as the inability of Greece to refinance 8.5 billion euros of debt by May 19 forced last week’s 110 billion support package, it was the realisation that other weak economies had over 200 billion in debt falling due in the next three months that helped produced a huge one off package of support that had to convince the markets once and for all that Europe was serious.
Around 216 billion euros of debt in Italy, Spain, Greece and Portugal fall due in the next three months. Italy dominates with 126 billion euros of debt in its own right.
While the debt could have been financed, it would have been done so at rising cost with interest rates soaring as lenders demanded greater returns for the higher risks.
It is very possible that not all this money could have been rolled over or repaid, which would have raised the prospect of default and a crash.
The IMF Sunday night signed off on its funding for the Greek bailout and will push enough money into the country for it to roll over 8.5 billion euros by the May 19 deadline.
But that backstop for Greece wasn’t enough, so on Friday, after Germany voted to approve its contribution, and then the eurozone leaders held a summit Friday night, our time, at which it was decided to up the stakes.
A package of measures would be designed so large and so convincing that it would end speculation against the euro and the weak members like Spain, Italy and Portugal, and stop it spreading to the UK and pulling the economies of all 27 members of the EU back into recession.
Now to see if it works, that’s the hard part.
