Europe’s bailout is short-term panacea

 EmailPrint This Post Print This Post

This post is a guest contribution by Asha Bangalore of The Northern Trust  Company.

The colossal rescue package from Europe announced today to stabilize markets is a coordinated contribution of euro-zone governments (€440 billion in loans), the IMF (€250 billion), and an EU (€60 billion) emergency fund amounting to a sum total of  €750 billion ($955 billion). There is support also from the European Central Bank (ECB) through its purchase of euro-zone government bonds and private bonds to “ensure depth and liquidity”. The actions of the ECB would be “sterilized” or offset by other bank operations.

On the other side of the Atlantic, the Fed reopened swap lines with the ECB and central banks in Japan, U.K., Canada and Switzerland. Essentially, the Fed extends loans to foreign central banks, which in turn use these funds to make U.S. dollar denominated loans to financial institutions in their home markets.

This is the gist of the actions announced today to stem the financial crisis in Europe. World markets have responded positively and markets have moved to calmer waters from the recent turbulent market sessions.

But, it is only a short-term respite; markets are bound to get jumpy again. The longer term issues will haunt financial markets eventually. The industrialized world is awash with public debt at levels not seen in peacetime. It is well known that the fiscal house of the industrialized world is in dreadful shape compared with less advanced world (see table below). If members of the euro-zone facing dire fiscal problems fail to put their house in order following the historic support program, moral hazard issues will creep in the short-term.

More compelling are the medium to long term problems not only of the troubled euro zone nations but the entire industrialized world arising from the pressing fiscal situation. A failure to address the explosion of public debt in the advanced economies will translate into higher interest rates, set backs in productivity and capital formation. In other words, the standard of living in the industrialized world is threatened by the rapid growth of public debt. The likely market response to the fiscal challenges ahead, after the dust settles, is the true dragon to slay. Or will the industrialized act soon and decisively to prevent another financial storm?

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, May 10, 2010.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

More on this topic (What's this?) Read more on European Union at Wikinvest
OverSeas Radio Network

1 comment to Europe’s bailout is short-term panacea

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

May 2010
MTWTFSS
« Apr Jun »
 12
3456789
10111213141516
17181920212223
24252627282930
31 

Feed the Bull