ECB QE: Easy As 1, 2, 3?

CNBC reported a little while ago that the European Central Bank bought €22 billion worth of Italian, Portuguese, Ireland & Spanish debt last week. This is exactly what the Federal Reserve is doing, with its quantitative easing program here. While the amount, €22 billion, was more expected, it is still a small drop in the hat as to what will actually be needed to stave off fears of a bond market run in these countries. The Euro Financial Stability Fund is hovering around $200 billion or so. These small purchases every week are not going to get it done. Italy has over $2 trillion in debt alone, and a 10 year yield still over 5%. If the ECB wants to get this situation under control, the EFSF needs to be expanded significantly. Tomorrow, Nicolas Sarkozy and Angela Merkel are set to meet to discuss these countries and the viability of the European Union's economic health. For now, Jean-Claude Trichet and the rest of the major players in the EU have saved the day. This could all change tomorrow, after Sarkozy and Merkel meet. France and Germany are the two largest economies in the EU, and these countries will bear the brunt of bailing out their less affluent partners. Just a few short days ago, it looked as if the Italian bond market was about to blow up. Last week, we saw S&P place Cyprus on Negative Credit Watch, and while Cyprus is nowhere near as large as Italy, it does show that the worries in the EU continue to run amok. Italy has been undergoing some serious austerity measures, as has Greece, and the other troubled European countries are probably going to have to undergo their own. The situation in Greece has gotten worse, not better, and has been amplified by the austerity measures. The ECB can not account for a country that stopped growing, as Greece has done. It can only stave off the inevitable for so long, before the chicken comes home to roost. The ECB's version of quantitative easing is going to be a little easier than what the Federal Reserve did here in the U.S., as the markets are not as liquid. Still, over time, the quantitative easing will only help for so long. The countries need to get real reform and cut out the fat that is hindering growth. The EFSF is the EU's silver bullet in this case, but with 17 countries needing to ratify it and expand the size, the political strife will almost certainly hinder its effectiveness. The Euro Financial Stability Fund is going to have to nearly quadruple in size, to help deal with the massive debt obligations among the "PIIGS." We will have to see EFSF guarantees on nearly all European debt to help steed off the loss of confidence, and even then, that may not be enough. For now, it's the ECB, and the ECB alone. Good luck guys. We'll all be watching. ACTION ITEMS:

Bullish:
Traders who believe that the EFSF will be a silver bullet might want to consider the following trades:

• Go long Italian banks, and iShares MSCI Italy Index ETF EWI which encompasses Italian equities.

• Also go long German banks which have heavy PIIGS exposure, such as Deutsche Bank DB.

Bearish:
Traders who believe that the EFSF will not save everything may consider alternate positions:

• The banks that have heavy PIIGS exposure will fold eventually.
  
  

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.