Pimco’s chief executive Mohamed El-Erian reacts to news that the European Union and IMF had agreed a €720bn emergency funding facility. His earlier guest post is available here.
The announcements coming out of Europe tonight are dramatic, and they confirm that policymakers have shifted to a “whatever it takes” approach to crisis management. The result is a massive policy response by the EU and ECB aimed at calming markets and safeguarding the euro. Other central banks are lending a helping hand.
The immediate reaction in global markets is to reverse some of last week’s moves that were caused by concerns about Greece, sovereign risk, and related risk aversion. Specifically, the announcements have led to a surge in equity markets, a strengthening of the euro, a fall in the price of gold, and a tightening in risk spreads on sovereign and corporate instruments.
Market participants will now spend a lot of time analyzing the minutiae of this dramatic policy response … this with a view to assessing its immediate impact, its durability, and the potential range of unintended consequences.
Many questions will need to be answered. They range from the operational (how will all these interventions be approved, financed and executed), to the conceptual (what does this mean for institutional integrity), to effectiveness (will the liquidity injection be used to support fiscal consolidation or end up deferring it).
Tonight, Europe has done much more than boldly step up in its policy response; it has taken it to a completely new level and dimension. We are now in unchartered waters when it comes to how all this will impact the secular workings and make-up of the eurozone.
Related links:
Wolfpack watch – FT Alphaville
Global authorities act to defuse market tension - FT
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