European Bailout Pushes Markets Higher

Includes: EEM, FXE, IEV, SPY, VGK
by: John Lounsbury

Gwen Robinson reports at that the EU (European Economic Union) has set up an emergency funding facility of up to €500bn to support loan guarantees and credit in Europe. The IMF (International Monetary Fund) has added an additional €220bn. This brings the total from these two sources to approximately $960 bn, significantly larger than the U.S. TARP package in the fall of 2008.

To support this effort, a currency swaps window has been reopened by the U.S. Federal Reserve to improve liquidity for world currencies, especially the British pound, the Swiss franc and the euro. See article by Scott Lanman and Craig Torres (Bloomberg). This window had just recently been closed (Feb. 1) after more than a year of operation to smooth systemic risks for currency exchange rates as a result of the banking crisis.

This time the window is being opened because of a sovereign debt crisis. But the reason for reopening the window is still to try to reduce the exposure (some say over exposure) of banks to sovereign debt. Prices have plummeted in recent weeks for the debt of several countries including Greece, Italy, Spain and Portugal.

Estimates are not available for the amount of money available from the Fed to support European central banks' efforts to keep the sovereign debt crisis from spreading. The peak in swaps funded in the last open period was $583.1 billion in December 2008.

There are also reports that the EU may even buy sovereign debt directly. This had been considered an extreme maneuver previously.

World markets have responded. Darren Boey and Saeromi Shin report at

Bloomberg that Asian markets and S&P 500 futures are up overnight. The euro and the pound are strengthening and the U.S. dollar has been weakening. As this is written (3 am New York), Singapore is up 2.5%, Hong Kong +2.3%, Japan Nikkei 225 +1.6% and Korea +1.8%. Shanghai is nearly unchanged. The first markets opened in Europe are up sharply, Paris and Brussels both about 5% higher. Yahoo reports that S&P 500 futures are up about 2%, well above fair value.

Even if the initial reactions hold, global stock markets will still have a way to go to recover the approximately $3 trillion valuation losses from last week.

Disclosure: Author holds long positions in several S&P 500 stocks.