Greek Bailout Deal is QE For Eurozone

Wednesday, 27 Jul 2011 09:01 AM

By Michael Carr

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The latest effort to save Greece could send European stock markets higher as the value of the euro falls.

The 440 billion euro agreement allows the European Central Bank to buy troubled assets from financial institutions. This may sound familiar to bailout weary investors since it is the same idea that was behind TARP, QE1, and QE2 in the United States.

At recent exchange rates, this latest effort is valued at about $630 billion, roughly the amount the U.S. Federal Reserve pumped into the economy under QE2.

Quantitative easing is the process of increasing the money supply by buying assets from banks. In theory the banks will use the cash for loans stimulating economic growth and creating jobs.

Led by Germany and France, European leaders settled on a plan to at least delay the day of reckoning in Greece. This latest plan goes one step farther in an effort to stop the crisis from spreading to other countries.

If it works like the program did in the United States, interest rates and the euro will fall as stock markets move higher. The European economy is a little larger than the U.S. economy, but is about the same size so the impact should be about the same, if all things are equal. Conditions aren’t perfectly equal, but they are most likely close enough that the impacts will be similar.

What remains to be seen is how deep the problems are in Europe, although the same could be said of the United States, which continues to struggle with the debt ceiling. China has said in the past that they are ready to invest more in Europe, and their recycled dollars may provide added stimulus as QE stabilizes the banking sector.

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