European Emergency Euro Fund - EU PIIGS Financial Debt Crisis Bailout Package

The EU and IMF have agreed to a Europe Financial Crisis Trillion Dollar Emergency Bailout Rescue Fund to stabilize the contagion that has swept world financial markets. The emergency package is aimed at also shored up the Euro single currency that has seen new lows with contagion selling. The EU also intends to establish a permanent crisis resolution framework. The magnitude of the package surprised market pundits and caught speculators short with the euro up 2 percent and stock futures rising also. Finally they’re some positive news clips for the markets.

This package is the largest since the response to the Global Financial Crisis Mark I when Lehman Brothers collapsed. The deal was finalized with European Union finance ministers and the International Monetary Fund. Group of Seven and Group of 20 finance ministers also backed the, measures. The U.S. Federal Reserve, the Swiss National Bank, European Central Bank and the Bank of Japan all reopened currency swap lines with one another. It remains to be seen if the Europe Financial Crisis Trillion Dollar Emergency Bailout Rescue Fund is well received after the initial market moves.

The sheer size of the Europe Financial Crisis Trillion Dollar Emergency Bailout Rescue Fund package seems to have caught all financial analysts and conspiracy theorists by surprise. The US$1 trillion package consists of 440 billion euros in guarantees from Euro Zone nations and an additional 60 billion euros in a European instrument for euro zone nations that face 'exceptional circumstances'. This is along the lines of the 50 billion euro lending facility available for EU members outside the euro zone.

The International Monetary Fund is expected to contribute 250 billion to the euros Europe Financial Crisis Trillion Dollar Emergency Fund, rounding the total package up to 750 billion euros, which is around US$1 trillion at current rates.

Europe has not been shy about their intent to defend the Euro currency. EU Monetary Affairs Commissioner Olli Rehn said the package 'proves we shall defend the euro whatever it takes'. The Euro popped two percent on this news and leaves many players short Euro and long gold and dollars out of pocket. Gold prices fell as much as 1.5 percent on the announcement.

The next 24 hours will be telling for those punters. The euro rose as high as $1.2950 before falling back a little on the ECB decision to buy debt through quantitative easing (QE). This is likely to weigh on the euro in the longer term as more Euro become available, supply versus demand. For the short term it stabilizes the Euro as firm measures have been implemented to solidify it.

Sweden's finance minister described the aggressive selling of Euro zone debt as 'wolf pack behaviors' and this would give a clear indication that the size of the package was intended to move markets and inflict pain on speculators. The PIIGS, Portugal, Ireland, Italy, Greece and Spain’s Financial debt markets were sold aggressively and seemingly with predatory intent, not unlike the predatory high frequency trading that saw a 1000 point drop on the Dow Jones Industrial Index last week.

The European Central Bank (ECB) will buy euro zone government bonds to stabilize and support the broken debt markets through the Europe Financial Crisis Trillion Dollar Emergency Fund. This abandons the ECB’s resistance to the 'nuclear option' of full-scale asset purchases. The ECB justified the change in policy because of the Greece and other government promises to meet strict budget targets to reduce debt.

The purpose of the multi central bank swap facility is to support the Euro. The has been whole scale buying of the US dollar and treasuries on safe haven buying which has led to a shortage of US dollars. The swap move is to ensure there is enough money in the global financial system and to restore confidence. The two-year swap spread narrowed sharply after the $1 trillion Europe Emergency Fund was announced to 29 basis points from around 35 basis points seen on Friday.

For the rescue package to work the money has to be put to good use. This means euro zone countries need to fast track fiscal austerity relief programs. These measures include structural reforms, budget consolidation and having sustainable finances. Improved economic growth through closer economic coordination within Europe is also sought. Plans for fiscal consolidation and would be accelerated where needed, they said.

The EU and the IMF approved a 100 billion euro package last week to support Greece. The market did not see this as averting contagion risk and hence the massive trillion dollar package. The cost of a Portugal, Ireland and Spain bailout along the lines of Greece is estimated to cost 500 billion euros. Economists estimate that Greece is the main culprit for the debt blowout and has seen its budget deficit blow out to 13.6 percent of GDP.

The path to reform is not easy and the deep budget cuts Greece committed to secure the funds has led to civil unrest. The deficit cuts are severe, as they need to get the budget deficit back down to the EU limit of 3 percent. Protests in Athens have been violent and have seen the death of three people after a bank was firebombed.

It is clear speculators have been put on notice from this package. Also the investigations called in the US over the 1000 point collapse in the Dow from a fat finger error or predatory High frequency trading suggest this.

Swedish Finance Minister Anders Borg said prior to the EU meeting 'We now see ... wolf pack behaviors, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart.'

The 'massive firepower' strategy arrested the global financial crisis of 2007-2009, where we saw the United States implement its $700 billion Troubled Asset Relief Program (TARP). However we have seen the fragility of the US marketplace when you can wipe 1000 points off the Dow seemingly so easily. The EU has also followed the Asian crisis of 1997-98 responses by the IMF here. The markets stabilized after the IMF assisted the regions most vulnerable economies of Thailand, Indonesia and South Korea. “Wolf pack” speculators were omni present there also.

The Europe Financial Crisis Trillion Dollar Emergency Fund seems to be achievable; even if all the Euro funds are spent the 500 billion euros will be equivalent to around 6 percent of the zone's gross domestic product. Given the amount is spread over several years it not beyond the zone's economic capacity and decidedly less compromising then the situation America is in.

The Europe Financial Crisis Trillion Dollar Emergency Fund or the $1 trillion Europe Emergency Fund is massive. The concerns are that the tough austerity measures may flounder with self interested or weak policy makers fail to make the hard decisions. Then if they do whether people will follow. You have the path the Estonian people took which was successful and the path the Greek people have taken so far which has caused violent protest. There are huge divergences among the Euro Zone’s economies that need to be resolved.

This concern will continue to unnerve the financial markets until concrete resolutions have been taken and responsibility accepted by the public in the vulnerable and offending states. If it happens than the long-term prospects of the Eurozone and the euro currency look bright.

It may well be that the bulk of the package is never used as in TARP and other US bailout packages. In these cases the announcement of the plans stabilized markets. The U.S. Treasury does not expect to deploy more than $550 billion of TARP funds. The Europeans seem to have also done a better job of catching the market short Euro assets and long Gold and dollar assets, which may stabilize the market also.

If the same happens in Europe then at current bond yields Portugal and Spain could continue borrowing from the market for a year and not waste more money to debt financing. Which means they can bring their debt ratios down as needed. If interest rates fall as they did in the U.S. this will become even more beneficial.

The biggest barriers to the process are political. Success for the package and its mechanism will rely on times to strong political will. In Germany, the Euro zone’s largest and most economically sound sate Chancellor Angela Merkel's centre-right coalition lost an election this weekend largely because of displeasure in Germany lending money to Greece. The election has taken away Merkel’s majority in the German parliament's upper house. The election was also in the state of North Rhine-Westphalia on Sunday.

It is important to gauge Germany’s political and economic situation, as they are the strongest spokes in the European wheel. The German Finance Minister Wolfgang Schaeuble has been seriously ill and he missed Sunday's rescue talks as he was hospitalized at the time. He is important to Merkel, as he has been a major proponent for Greece aid.

If the states receiving aid do not nail down or are simply unable to meet the tough austerity conditions attached to the bailout loans it will become difficult to maintain political will when you are throwing your own money away. Germans may wish all European states follow Estonia’s example but what is forgotten often is Europe is a mix of multiple cultures and as such not so easy to maintain.

Governments of some of the nations facing severe austerity measures may choose to restructure debt to reduce the pain of austerity measures on their citizens and walk away from the Euro and Eurozone even. It is a big ask as the $1 trillion Europe Emergency Fund buys them three years to repair and reform their uncompetitive economies. Is that enough for some of these nations or will the ECB be more accommodating if an effort is being made? These are the question market players will examine over the coming years.

The ECB will be interesting to watch here, they took an unprecedented step in going down the 'nuclear option' QE path by buying government and private debt in the euro zone. Is this a big change forward or something ECB policymakers will want to pull back from? It is important to note that last Thursday the ECB said it had not even considered the measure. Then we had the 1000-point meltdown in the US stock market. 

Last month a Reuters poll of 54 economists saw a 20 percent chance of a Greek debt restructuring over the next 12 months, 30 percent over the next five years, and a 9 percent chance of Greece leaving the euro zone in five years. This is after the Greek emergency aid plan. However economists are notoriously wrong, remember the majority said there never would be a financial crisis.

Konrad Hummler, the respected chairman of the Swiss Private Bankers Association said that banks would have to write down their Greek exposure. He estimated on Friday this would be around 100 to 150 billion euros worth. Greece has about 300 billion euros of sovereign debt, and he estimates a 30 to 50 percent write-down is likely.

The U.S. Treasury market has responded positively to the Trillion Dollar Europe Emergency Fund. Interestingly if it becomes a wholesale love fest for Europe then it may be costly for America, as the U.S. has benefited from safe haven buying. Treasuries fell sharply in early Tokyo after the announcement of the package, This means interest rates go higher and the next lot of US bond auctions will carry a higher servicing cost as a result.

The Eurozone crisis has been a boon for America as it is saddled with an extraordinary amount of debt from the Obama bailouts and Bernanke’s printing press. Last week the 10-year yield went to it’s lowest level since December as low at 3.27 percent. Since the Europe Financial Crisis Trillion Dollar Emergency Bailout Rescue Fund announcement the benchmark Treasury note dropped 1-4/32 in price to yield 3.556 percent, jumping 12 basis points.

Hopefully the Europe Financial Crisis Trillion Dollar Emergency Bailout Rescue Fund settles down the financial markets for a bit here, we could use less volatility. This will enable analyst and investors to gauge where the global economy is through all this. Markets have also the financial regulation reforms to go through in the US, the Goldman Sachs crisis and the BP oil spill to contend with.