Agreement in Europe

An agreement emerges from the late night meetings in Europe:

E.U. in Deal to Aid Troubled Economies, NY Times: Pressured by sliding markets and doubts over their ability to act in unison, European leaders agreed on Sunday to provide $640 billion in new loans to the Continent’s debt-riddled nations in a sweeping effort to regain lost credibility with investors.

After more than 10 hours of talks, finance ministers from the European Union agreed on a deal that would provide $560 billion in bilateral loans and $76 billion under an existing lending program managed by the European Commission, the union’s executive body. Elena Salgado, the Spanish finance minister, who announced the deal, said the International Monetary Fund was prepared to give up to $280 billion separately.

Officials are hoping the size of the program will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008. The leaders were making yet another attempt to stem a debt crisis that has engulfed Europe and global markets. ...

While the sums being discussed are eye-catching, some bankers questioned whether they would be enough to calm the markets. One banker said that with more and more European economies coping with rising deficits that raising, guaranteeing or backing such a large number would not be an easy task — unless the European Central Bank stepped in a more forceful and specific manner. The bank has so far rebuffed calls to inject liquidity into the markets by buying back European bonds.

There were many complications in trying to forge a consensus on a new package. They included defining the role of Britain, which lies outside the euro zone and had said it would not help in propping up the euro, as well as the European Central Bank. The fractiousness underscores the frailty of a monetary union in which its richest member, Germany, is also the most opposed to a financial rescue. ...

Even now, despite the lashing rhetoric and the Sunday night pan European meeting, there is still a feeling that Europe should be doing more — notably with regard to freeing the European Central Bank to go against its charter and print money by buying back distressed European bonds from the secondary market. ...

Speaking of central banks, the Fed announced that it is reopening liquidity swap facilities to send dollars to Europe:

Press Release
Release Date: May 9, 2010
For release at 9:15 p.m. EDT

In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

Federal Reserve Actions
The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank. The arrangements with the Bank of England, the ECB, and the Swiss National Bank will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously.

These swap arrangements have been authorized through January 2011. Further details on these arrangements will be available shortly.

One thing I learned from the recent financial crisis is that measures that seemed more than adequate at the time were never enough in retrospect. Is this response of sufficient magnitude? It's a good chunk of change, no doubt about that, but a larger response would have provided more comfort.

Update: From Real Time Economics at the WSJ:

The European Central Bank, in a stunning change of position, said Sunday night it will buy government and private debt on “dysfunctional” European markets as part of a concerted show of force by European authorities to persuade financial markets that they are, in fact, responding to the spreading sovereign debt crisis in the euro zone.  http://www.ecb.int/press/pr/date/2010/html/pr100510.en.html.