By GRAHAM FROST 10/05/2010
Over the weekend the European Union, working closely with the International Monetary Fund (IMF) hammered out a loan package.
The bailout package
The purpose of the package was to stop the Greek sovereign debt crisis from spreading and threatening to break up the euro. Last week the euro’s value fell as investors fled to traditional safe haven assets such as gold and the US dollar.
The 16 Euro nations have agreed in a statement, to offer up to €750 billion to countries facing instability, with the European Central Bank (ECB) confirming it will buy government and private debt, fulfilling its role as lender of last resort and providing essential liquidity to the banks that it had previously withdrawn. As part of the agreement the IMF will provide up to €250 billion to support the region.
The reaction
The strong position Europe has taken in dealing with the crisis has been well received by stock markets with the FTSE 100 up 5% today and the euro rebounding.
Is it over?
Whilst the market has reacted well to this action, there remains concern over how the ECB and Euro nations will pay for the bailout package, particularly when they all need to make large spending cuts and raise taxes. In the longer term, success will be based on whether the countries involved will can take the strong measures needed to reduce the deficits they have accumulated.
Our view
The market movements over the last couple of days highlight how important it is for investors not to act rashly in such situations. Markets can change direction very quickly and it is difficult for investors to respond. As ever, the key is to maintain a well diversified portfolio which is frequently monitored and reviewed. You can read more on our website about asset allocation or use the Client Centre to determine if your portfolio is well diversified.
Some analysts don’t think this bailout will be enough, but if it inspires confidence in the financial system it will have done its job and the markets seem to suggest it has.
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