The EU to help ease concerns of the debt crisis, unleashed a 750 billion € credit facility, an amount much greater than earlier reported. Finance ministers announced that the EU will pledge 440 billion € in addition to the 60 billion € in an existing program with the remaining 250 billion € from the International Monetary Fund.

In an attempt to paralyze contagion, the European Central Bank did an about face from last Thursday and will intervene in the markets through debt purchases. Furthermore, in order to ensure liquidity in the markets, the ECB will offer unlimited fixed-rate offerings of 3-month loans to banks as well as offer dollar swaps with the Federal Reserve. Both of these tools were present during the onset of the financial crisis.

However, there are good reasons not to get too excited about these measures. The ECB’s bond purchases will be sterilised. This means that the Bank will sell other assets or issue its own debt to finance the purchases instead of pursuing outright “quantitative easing” by expanding the monetary base (or “printing money”) as the Bank of England and Federal Reserve have.

Much more importantly, though, the measures do nothing to address the underlying issues that got the euro-zone into this mess in the first place. The fact remains that government debt has soared to unprecedented and unsustainable levels throughout the region. This has already prompted the
European Commission to call for extremely aggressive fiscal tightening ranging from a cumulative 2% of GDP in Germany to an eye-watering 10% of GDP for Greece over the next few years !!!

So the euro-zone’s peripheral economies are clearly in for a very painful adjustment regardless of today’s measures…