“Nuclear Option” sends global markets soaring

Bourses around the globe and U.S. stock futures are soaring in response to Europe’s near-trillion-dollar bailout package and the European Central Bank’s decision to purchase government securities. These moves, which had been considered the “nuclear option” to save the euro, recall the dual U.S. actions in enacting the TARP for $775 billion in 20008 and the Federal Reserve’s “quantitative easing” through the purchases of $1.75 trillion in securities. Global markets clearly are thinking the response to the European actions will be similar. In any case, bearish sentiment had gotten so thick that short-covering undoubtedly is helping to fuel the advance of 4% and more Monday.

The markets’ deterioration has produced a “post-Lehman” scale international response consisting of both EU and IMF capital for European governments and central-bank liquidity from ECB securities purchases and the reactivation of the Fed’s swap lines with other monetary authorities, writes Lena Komileva, head of G7 economics at Tullett Prebon.

“The considerable upsizing of the stabilisation package and its speedy announcement ahead of the European open shows that officials realise that the situation in global capital markets last week threatened to become uncontainable and this has helped policy officials to regain the upper hand over the markets,” she writes.

“However investors will remain cautious about the details of the conditionality attached to the support program, the mechanism of the release of the funds and how it will ultimately be funded by each government, including any future possible recapitalization of the IMF. Equally, a global stabilization mechanism for sovereign credits is the means to an end that is needed to create breathing room for each government to restore its fiscal credibility; it is not the end-game strategy, and investors will expect corrective actions to be implemented in each sovereign balance sheet, presumably with IMF supervision and conditionality superseding domestic political and policy risks,” Komileva concludes.