eTARP – The $1,000,000,000,000 Rescue Package

May 10, 2010 1:35 am

kick the canHere is a great summary of the we are calling eTARP. It is from the morning notes of JP Morgan and it does a good job of explaining what we know so far. Some of the details are still sketchy, but there is obviously enough money available to help the region with the difficulties that are presenting themselves – at least for some time.

This is another proverbial – kicking of the can down the road. The structural problems still exist for the region and this is not a direct stimulus package that many investors may believe. This is similar to a backstop/bailout. Money may not flowing directly to consumers as many many investors may seem to think. Rather, this is a plan to ensure the timely payment of the debt coming due and to maintain order of the Euro.

Note: With the Euro partially off limits to attack by traders, will the U.K Pound continue to come under pressure? As there is a hung Parliament and not much wiggle room to go to the well for more money in defense of their currency, it may be an area of concern in the coming weeks.

Some notes from JPM:

1 – EU720B Stabilization Fund:

  • The EU720B plan consists of government-backed loan guarantees and bilateral loans worth up to €440bn provided by eurozone members; a further €60bn supported by all EU members through expansion of an existing balance of payments facility; and up to €220bn provided by the IMF (per the FT).
  • Elena Salgado, Spain’s finance minister, said that the €440 billion would be available over three years, and would need approval from contributing governments. She said a new “special purpose vehicle” would be created to make these loans (WSJ)
  • Germany’s Merkel said her cabinet would sign off on the Sun night package during a special meeting on Tues

2 – ECB takes several actions:

  • To conduct interventions in the euro area public and private debt securities markets (Securities Markets Program) to ensure depth and liquidity in those market segments which are dysfunctional. The scope of the interventions will be determined by the Governing Council. In order to sterilize the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Program. This will ensure that the monetary policy stance will not be affected.
  • In order to sterilize the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Program. This will ensure that the monetary policy stance will not be affected.
  • To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.
  • JPMorgan comments (D Mackie) – trying to make sense of the ECB “sterilization” comment – In our view, the most sensible way of interpreting the statement about sterilisation is that it is about the medium term. The ECB will conduct outright purchases and the acquired debt instruments may remain on their balance sheet until maturity. But, as conditions return to normal, we will move back to the situation where excess reserves in the system are determined by the central bank, rather than the banks. In this sense, the impact of outright purchases will be sterilised, in order to “ensure that the monetary policy stance will not be affected”.


3 – Swap lines re-established:

  • FX swap lines re-established between the Fed and other central banks, inc. the ECB – “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”. The BOJ board decided Monday to temporarily reestablish a U.S. dollar swap agreement with the Federal Reserve and restart dollar-fund provision operations.

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