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The Greek Bailout: Questions Still Abound for Forex Traders
05/11/2010 9:24 am EST
Despite the lack of US economic data yesterday, it was an extremely active morning in the financial markets. The “new” EU/IMF rescue package has restored risk appetite, lifting currencies and equities in the process. At the open, the Dow rose more than 400 points while the S&P 500 saw its sharpest gains since May 2009.
On Friday, we said the euro could only be stabilized by a sensational announcement, and the sticker shock of the nearly $1 trillion EU/IMF bailout combined with the nuclear plan of the ECB buying government bonds was targeted at providing shock and awe.
In some ways it has been successful and in some ways not. Unfortunately, the EUR/USD has rebounded, but not by as much as policymakers may have hoped because there are still a number of unanswered questions:
1. What will be the exact mechanics behind the special purpose vehicle that will provide the EUR 440 billion that is guaranteed by member states? What are the rules and terms?
2. Will the SPV need to be approved by individual nations/Parliaments, and if so, when will this happen?
3. Will Greece accept these terms? Will they amend it?
4. Can all countries afford to contribute to the plan, and will the countries seeking aid be able to handle the tough conditions that may accompany the loans?
5. The IMF supposedly has $268 billion left; where are they getting the rest of the money?
6. What is the size and scope of the ECB's bond purchases?
Although European policymakers and the G7 are committed to defending the euro with many political hurdles ahead, the details need to be ironed out and it may be a while before it is finally implemented.
At the same time, the ECB's decision to buy government bonds has also undermined the central bank's credibility. Last Thursday, ECB president Trichet said buying government bonds was not even discussed, and two trading days later, the announcement was made. It is hard to believe that the central bank was not pressured into market intervention, particularly since the decision was not unanimous. Investors are rightfully concerned that the central bank has not figured the details out and are simply providing additional firepower to the EU/IMF's announcement.
Ultimately, the fact that the ECB is implementing a light version of quantitative easing will limit the positive impact of the rescue plan. The markets may not find support until the plan is finally implemented.
By Kathy Lien of GFTForex.com
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