Last night the Eurozone leaders agreed with the IMF on a €750bn emergency funding package to help protect various sovereign bond markets from speculative attacks. The package takes the form of €440bn from Eurozone member states, €60bn from the EU balance of payments facility and €250bn from the IMF, this is over and above the €110 earmarked for Greece already. And although the plan is for Eurozone nations both Sweden and Poland will also be taking part.
The new move is described as being ‘Shock and Awe part II‘. The move came after a 14 hour meeting which was in part prompted when Barack Obama called Angela Merkel & Nicolas Sarkozy to use resolute steps to reign in the contagion that had markets in turmoil last week. The first week in May was marked by a spectacular 1,000 pt drop in the Dow Jones industrial average on Thursday night and of wild volatility on the Sovereign debt and forex markets. Meanwhile, the Dow story remains somewhat of an enigma, some reports blame a ‘fat finger’ trade and others report that it was due to key resistance levels in the Dow and the S&P being broken which triggered automated trades.
The yield drop in US Treasuries is a sure sign that in times of total uncertainty the market players went and hid in the Buck, the US dollar might have some serious problems in a secular market, but short term it is still the first safe haven of consideration and drops in the 10yr note are clear evidence that positions were liquidated and taken up in US paper.
Last week gold also broke a key resistance at $1,214 and it reached new heights not only in USD but also in sterling and euro prices as well.
This intervention is ‘good news’ in the sense that it puts of the day off reckoning, but curing debt with more debt is a dangerous game, and now it will be virtually impossible to resist calls for bailouts or rescue packages – look at the precedent that has been set? Eventually, the euro will have to be able to stand the test of the markets, not because of what we do to support it, but of itself, otherwise there can never be a functional monetary union, sound money comes at a price – one that Europe is not yet willing to pay.