Europe Does a TARP Redux of almost $1 trillion dollars

Europe is putting up a $952 billion loan package.

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.

Jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance worth as much as 750 billion euros ($962 billion) to countries under attack from speculators. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt.

So, instead of bailing out banks, this sounds similar to TARP except it is to bail out European countries.

Meanwhile, the Federal Reserve is opening up currency swaps to loan to foreign central banks. From their press release:

Press Release
Federal Reserve 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.

And you thought the trillions on the Fed balance sheet were too much already. Yet the Federal Reserve claims these currency swaps pose no risk. It's quite confusing and the NY Fed has released a currency swap primer on how it all works. Take 'em on their word for now but it seems the no risk claim is completely dependent upon foreign central banks remaining stable.

At the time of this post, stock futures are soaring, including commodities.



Europe central banks monetizing bonds

First France and now Germany.
The race to the bottom of worldwide currency devaluation just entered the home stretch.

can you explain to me

how precisely the currency swaps by the Fed to foreign central banks carries no risk under these circumstances?

I think currency devaluation as a way to deal with crushing debt is a stated strategy.

This is just so psycho. "We've got a debt problem, therefore we will throw more debt at it". I keep getting the feeling we're in 1930-1931.

graphic of EU bail out

Over at the New York Times.