Europe's nearly $1 trillion bailout plan has done much more than boldly step up in its policy response; it has taken it to a completely new level and dimension, says Pimco co-CEO Mohamed El-Erian.
"We are now in uncharted waters when it comes to how all this will impact the secular workings and make-up of the euro zone," El-Erian writes in the Financial Times.
The announcement of Europe’s rescue fund confirms that policymakers have shifted to a “whatever it takes” approach to crisis management, El-Erian notes.
“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,” he says.
“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.”
Many questions remain to be answered, El-Erian says, among them how these interventions will be approved, financed and executed, the effects this will have on institutional integrity, and whether the liquidity injection will be used to support fiscal consolidation or end up deferring it.
European Central Bank president Jean-Claude Trichet has rejected suggestions that the bank's decision to buy government bonds compromised its legal independence from euro zone governments, saying the shared currency's chief monetary authority remained "fiercely and totally independent," ABC News reports.
The purchases supported bonds, cut borrowing costs for countries, and supports banks that hold the bonds — but it also deploys bank resources to bail out countries that spent themselves into trouble.
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