European governments and the IMF have announced a $900+ billion arrangement to buy and/or guarantee sovereign debt. The European Central Bank has also specified it will buy securities in the secondary market (i.e. purchasing debt issued by countries and perhaps banks from investors). The details are incredibly sketchy at this point, and Calculated Risk has done the best job of following the drama, which as his posts attest reached near Mr. Bean levels of absurdity earlier today.
Only time will tell if this deal works economically and politically. Germany held a regional election today and Angela Merkel’s coalition suffered a setback wherein it lost the majority in the upper house. I really have little idea what this means operationally but it being touted as a major blow to her economic policies.
This deal smacks of TARP: they have an amount but know little about what to do with it. Over the coming months we shall see.
Update: As usual, Yves Smith at Naked Capitalism has a take that really cuts to the heart of the matter.
The ECB may be hoping that these rescue measures may prove sufficient to alleviate pressure on the banks, but my correspondents were skeptical. As one noted, “But it looks like it’s all coming from euro zone governments. I suppose since nobody is really questioning solvency of France or Germany, that might help, but how do Spain, Portugal and Italy contribute? And God will it be DEFLATIONARY if it’s not ECB money.”
The last point is key. If deflation kicks in within the countries at risk (forget Greece, the eurozone ought to be in triage mode) the debt burden become worse. All the rescue operation has done is buy breathing room while making the eventual outcome worse. While having the ECB support the operation may offend some tender sensibilities, it can offset the deflationary pressures and make Portugal and Spain more viable short term.