Asian equity markets staged a broad-based recovery this morning after the EU and IMF agreed to commit as much as EUR 750 bn to assist troubled Eurozone countries amid the sovereign debt crisis. After a marathon 11-hour emergency meeting of EU finance ministers on Sunday, the EU announced it would establish a new Special Purpose Vehicle under which Eurozone governments will pledge up to EUR 440 bn in bilateral loans or guarantees to fund a safety net for weakened EU nations. The EU decided to establish a European stabilization mechanism, under which the EU will commit EUR 60 bn in loans from its budget. The IMF will participate in the rescue package by providing up to EUR 250 bn through its usual facilities in line with the recent European programs.
Notably, the ECB confirmed that it would intervene in the Eurozone's public and private debt markets to ensure depth and liquidity of certain market segments which are dysfunctional by providing liquidity through buying and selling bonds in the secondary markets. The Federal Reserve will also reactivate the liquidity swap lines and resume US dollar liquidity-providing operations at terms of 7 and 84 days to help relieve the funding issues of European banks. The first operation will be carried out on 11 May 2010. According to the EU statement, Spain and Portugal have committed to taking significant additional consolidation measures in 2010 and 2011 and they will present the new measures to the meeting of EU finance ministers on 18 May.
The EU's slow response to the sovereign debt crisis resulted in sharp fall in the EUR and global equity markets last week. Asian markets reacted positively to the rescue agreement as the size of the package has exceeded any of the previous numbers
discussed in the markets. Furthermore, the degree of coordination among the EU, ECB and IMF has reassured the markets. We think the EUR 750 bn stabilization package is a positive and significant step to restore investor confidence, stabilize the capital markets and contain global contagion risk, though execution risk of the rescue plan could fuel near-term market volatility. In Asia, the regional economies are relatively immune from contagion risk of the European debt crisis. Being net international creditors with massive foreign exchange reserves, strong current account surplus and low leverage, Asia's robust macro and financial fundamentals remain supportive for the equity markets. We reiterate our constructive strategic view on Asian equities and regard any near-term market weakness induced by the sovereign debt crisis as buying opportunities for strategic investors on a 6-12+ months investment horizon.
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