Thursday, September 15, 2011
For those paying really close attention to markets afterhours, one would have noticed a bit of a jump in S&P index futures following a Reuters report that European officials are considering a program used by the U.S. to jumpstart stalled credit markets in 2008. Specifically, U.S. Treasury Secretary Geithner suggested the Europeans employ a TALF like program to buy distressed sovereign bonds. In 2008, TALF (Term Asset-Backed Securities (ABS) Loan Facility) enabled the New York Fed, where Timothy Geithner was President, to purchase $200 billion in ABS with the Treasury offering $20 billion in credit protection.
Presumably, the Europeans would use the EUR 440 billion EFSF to provide credit guarantees to the ECB who would then greatly expand its already sizable purchases of sovereign debt. The only difference in future ECB sovereign debt purchases would be the credit guarantee provided by European taxpayers. One of the criticisms of ECB sovereign bond buying is the credit risk it is taking on its books.
While the EFSF is not expected to be passed by all relevant national governments till late September, there are no specific hurdles toward passage. Any hint that a EU legislature were contemplating not passing the EFSF enabling legislation would be a serious negative in Europe’s fight to contain the sovereign debt crisis.
Whether a TALF like program will make much difference to Europe’s troubles remains to be seen. At this point, it seemed as if the ECB was already prepared to refinance all of Italy’s and Spains needs. Nonetheless, equity markets are taking any comment regarding Europe as positive, and have reacted to this latest news in predictable fashion. While economic data has been universally poor, equities continue to operate as if this mattered not a whit.
Just like today’s news that the ECB and other central banks were to reintroduce three-month dollar liquidity operations in the fourth quarter caused a sharp rally in beleaguered European banks, this latest news of a possible TALF for Europe will no doubt receive additional stock market applause.
Precious metal prices have been under pressure over the last few days as tensions seem to be easing in Europe. However, the quid pro quo for all the official action by central banks is likely to be additional austerity for over-indebted nations. This will weigh further on the global economy which is already operating at what is now being called “stall” speed. Meanwhile, central banks around the world will continue printing money at a extremely rapid clip. For instance, by some estimates, the ECB is purchasing more government debt per month than the Fed did during its quantitative easing programs. Whether gold and silver prices will remain challenged in this environment remains to be seen.