E.U. to Launch their Bailout Bazooka but Will it be a Dud?

(eToro Blog) Today, in conjunction with the Eurozone meeting of Finance Ministers, is the inauguration of the Eurozone’s €500 billion bailout fund, aka the European Stability Mechanism, which will become operational. In theory, the fund was established to provide support to financially troubled Eurozone nations and to quell investors’ jitters over rising bond yields. Analysts say that its application won’t be quite so cut and dried, however.

There continues to be disagreement as to how the bailout fund would work and its effectiveness at raising additional funds. Given that, some analysts have expressed concern that the so-called “bazooka” wont’ be primed to fire for those countries (Spain and Greece both come immediately to mind) with the direst and most immediate need.

The 17 E.U. members will eventually (by 2014) have contributed a total of €80 billion into the fund, of which the first installment of €32 billion is due on Thursday. The contribution is in the form of cash, not governmental guarantees. How the bazooka will be fully armed with €500 billion worth of firepower is by selling the funds’ bonds on the open market, though what kind of demand they may get is uncertain and for some analysts “the biggest unknown.”

Despite the surmounting of one legal hurdle in the German high court, the disposition of the funds is still a point of contention among several of the E.U. members. Recently, Germany, the Netherlands and Finland proposed that only future bank bailouts be considered, and the fund should not be used to rectify the banking crisis which is currently ongoing in Spain and elsewhere. It is estimated that Spain could need as much as €40 billion in capital for its banking sector, which is more than the total of the initial contributions.

An agreement made in June to allow the fund to directly capitalize the troubled banks rather than pass through the respective governments and which would be overseen by the European Central Bank also seems in jeopardy of being redacted. Germany and France are presently at odds over the ECB’s likely role.

The E.U. finance ministers will make up the board of the ESM, and Jean-Claude Juncker is expected to be named head of the fund. Clarity of the rules is unlikely to be forthcoming, this week at least. That uncertainty and news that Greece’s next bailout tranche payment may be postponed are putting pressure on the Euro.

Currently, the EUR/USD pair is trading at 1.2950, down from 1.3016 earlier in the session; sentiment among OpenBook’s traders is bearish by a slight margin. OpenBook guru babczyk from Germany earned 10% on a short position which hit its TP a short while ago; the guru has a 93.1% allocation in the pair which has earned 3.1% over the last six months. OpenBook guru NMarijus from Lithuania earned 5% on his TP-striking short position; the guru has had a 96.1% allocation which earned 3.4% over the past six months. Likewise, guru Hschinner from Germany earned 6.25% on his short position which also hit its TP. The guru’s 48.3% stake in the EUR/USD pair earned 4.2% over the past six months.

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