What the ECB’s rescue package means for investors

The markets have rallied quickly this morning after the ECB agreed to step in to contain the Greek crisis.

The ECB (European Central Bank) agreed to a EUR 750 billion package to buy bonds. At the same time it encouraged bi-lateral USD swap agreements with a number of other G7 partners to help ease USD funding problems for the European banks.

Investors fled risk based currency positions such as the JPY and USD. However this movement has not carried over to gold which remains relatively unmoved.

The ECB package

"Overnight, EU finance ministers reached agreement on a support plan for nations facing financial meltdown. It will consist of up to €440 billion in loans from euro-zone governments and €60 billion from an E.U. emergency fund, in addition to €250 billion from the International Monetary Fund." reports the Wall Street Journal.

The move is designed to free liquidity in the markets, restoring strength to the banks’ balance sheets to allow them to lend again.

What the ECB’s rescue package means for investors

The current package is not the same as the Quantitative Easing undertaken by Britain and the US. No money printing is yet taking place. Instead the ECB will be offsetting an asset against one they purchase. For example, for each Greek bond they buy they will sell a German bund.

There are many problems with the approach taken. The government bonds which the ECB intend to buy are the very same bonds the rating agencies recently downgraded to junk status. The risk that Greece will never pay them back is high and this has not changed. Effectively, if the Greeks are never able to repay that debt, it would leave a vast hole in the ECB’s accounts.

The risk of default has been contained for now, but it is a matter of restructuring debt and implementing the tough new fiscal tightening measures which the Greeks will still have to contend with. Spain and others now see a way out of their own mess but it will be an unpleasant ride and someone, somewhere will have to foot the bill.

The immediate effect has been a rally in the EUR and the stock markets. But as investors digest the news its impact may change for the EUR. Other members are still at risk, and Greece’s fundamentals have not changed.

As the markets rise this morning and risk aversion is cast aside we’ll look to see what affect it has on gold prices today. Gold will now have to compete against other equities that have started to look attractive to investors. Its safe haven appeal is still a valid reason to own gold especially since we’ve not seen any swings in the dollar which has to face its own day of reckoning. We may be entering another boom for stocks just when things seemed to be stalling. This bail out moves the eventual bust further away. But when the time comes it will be even bigger.

Digger,
Gold Price Today

Important

Information in Gold Price Today is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision.