Breaking news tonight from Brussels, as the ECB's and IMF's weekend of collusion and conspiracy have resulted in a nearly $1 Trillion total Eurozone bailout operation. The plan to ostensibly backstop the euro stands to leave US taxpayers on the hook for $50,083,000,000 in what will be another massive international transfer of wealth.
This plan is another, separate eurozone-orchestrated bailout operation that is independent of, and in addition to, the Greek bailout adopted on Friday. To recap the Greek bailout, on April 26, I wrote a post detailing the $3.417 Billion planned contribution from US taxpayers to the Greek bondholders on a then €45 Billion ECB-IMF bailout. Before that plan could even be finalized, it was more than doubled to €110 Billion, entailing a $6.834 Billion US-backed contribution, on May 2. This second ( €110 Billion) plan was finally approved by all eurozone nations on Friday, and the IMF cleared the way Saturday for its €30 Billion contribution (of which $6.834 will come from the US).
This €110 Billion Greek bailout, however, was just the tip of the iceburg. We now know that the ECB, the IMF, and the EU and EMU finance ministers have spent the weekend colluding in Brussels to hammer out an even more massive taxpayer-backed bailout. This time the package is not for the salvation a specific eurozone nation, but for the salvation the euro itself. Last week, the euro fell 4.1% against the dollar, the most since the 2008 collapse, including a huge beat-down on Thursday, May 6, during the euro-linked 998 DJIA plunge in New York. Check out this video series to watch the drama unfold.
And now today, Sunday, an announcement has come that the ECB and IMF have concocted an incredible €750 Billion ($962 Billion) plan to backstop the faltering euro currency and its "P-I-I-G-S" bankrupt member nations, even as the "G" (Greece) has already been awarded the €110 Billion. The latest bailout is basically Euro-TARP 2010--but even larger than the $700 Billion TARP plan approved by the US Congress on October 3, 2008. Also, instead of propping up the banks as TARP was supposed to do, this ECB-IMF program is clearly intended to prop up the euro and the eurozone nations themselves. It is, according to the Financial Times, an attempt to "Shock and Awe" the bond markets into confidence in the euro. Bloomberg reported the words of Marco Annunziata, chief economist at UniCredit, as:
“This is Shock and Awe, Part II and in 3-D,” “This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion.”
Oh, sure--a central bank just knows everything is going well when it has to "shock and awe" the markets into believing in its competency, its member solvency, and its currency. Confidence in the euro remains solidly mixed. As I write this, the euro has rallied off the latest news of the huge backstop to over $1.29, from a 14-month low of under $1.26 on Thursday. Still, bets against the euro reached yet another record level on Friday, May 7, even after the Greek package was approved. A "bank funding crunch" has meanwhile developed, which is increasing both the cost of interbank lending and the reluctance of banks so to lend. Currently, interbank credit in Europe is the tightest and most fragile it has been since the collapse of Lehman Brothers in September 2008, when the bankruptcy cut the interbank liquidity strings and snapped lending to a standstill. The ECB-IMF plan announced is intended to protect the euro at any cost--starting at about $1 Trillion. From the latest Bloomberg article posted just hours ago:
"European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.
"Jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance worth as much as 750 billion euros ($962 billion) to countries under attack from speculators. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt.
“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after the 14-hour meeting.
"Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that the show of financial force would prevent a sovereign-debt crisis and muffle speculation that the 11-year-old euro might break apart."
The $962 Billion plan makes it very clear that the ECB and IMF will take whatever desperate, confiscatory measures necessary to prevent the markets from ripping the euro to shreds, even without the consent or concurrence of the people of the eurozone nations to whom the bill will be addressed. The plan even includes monetizing the debt of member nations through support of bond auctions, and even intervention to the secondary bond markets to control the price of traded debt through the central-bank purchase of debt, if necessary. Considering this last point, you should not be surprised that the Federal Reserve is helping.
US cost, Federal Reserve involvement
Included in the ECB-IMF plan is a staggering €250 Billion ($324 Billion) from the IMF. With a 17% stake, the US contribution to save the euro, monetize debt, and otherwise intervene in the bond markets will therefore be €42.5 Billion, or over $50 Billion (at the current 1.295 conversion rate).
Additionally, the Federal Reserve has re-opened the euro-dollar swap facility. This special facility was created during the crisis to fund the demand for dollars internationally during the crunch, and all lines were closed in February 2010. Now, months later and at the request of the ECB and IMF, the Mr Bernanke has agreed to re-open the swap lines. Euro-dollar swaps are agreements between the Federal Reserve and ECB to exchange currencies with the obligation to reverse the transaction in the future; the ECB then sells the dollars to European banks, and the Federal Reserve either sells the euros or holds them. The agreement entangles the dollar in this euro mess even more than it already is, and is meant to decrease the pressure on euro in dollar terms, as banks can have assured access to dollars through the ECB's swap at a certain price. The agreement will allow the ECB to sell unlimited amounts of US dollars.
The ECB might receive more help from the Federal Reserve--not in the form of more swaps, but in the form of advice. The ECB today announced that it too will pursue the path of monetization of debt, a path well-pounded by the the Federal Reserve. Just as the Federal Reserve has recently (they claim) completed the "buying" at least $300 Billion in US Treasuries from auctions and secondary markets, the ECB will soon embark upon a monetization of euro debt in an attempt to keep the yields low and the price of financing within reach of the over-extended eurozone nations such as Greece, Spain, Italy, Ireland, and Portgual. As last week's routing demonstrated, lenders to these eurozone nations are currently demanding a serious premium in return for buying what the market considers risky debt.
This weekend's developements cast an even more suspicious angle on the market plunge we witnessed on Thursday. Like everyone else, I'm still investigating that day. I've already noticed the similarities between October 1, 2008 and May 6, 2010, as I'm sure you have too. I've noticed the difference is TARP in 2008 and euro in 2010. This $962 Billion bombshell makes these similarities even more suspicious. I wonder if the phrase "martial law" surfaced in Brussells this weekend as it did in Washington in 2008.
I won't be surprised it if did.