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28 July 2011

Bloomberg: The euro crisis - big rescue, big doubts


This time is different. Really. That was the message from EU leaders after the debt-crisis summit produced an additional €109 billion in loans for deficit-bloated Greece, easier aid terms for Ireland and Portugal, and a retooled bailout fund to prevent markets from trashing Spain and Italy as well.

The euro, as well as the distressed countries’ bonds, rallied. Then doubts started to creep in and the markets teetered. The big concerns of investors and analysts are that the bailout fund is not financed well enough to handle a widespread attack on the bonds of several countries; that bondholders who had to sustain losses in the latest Greek bailout will suffer the same fate in Ireland and Portugal; and that the Greek crisis is far from over. Finally there’s the worry that Europe cannot act decisively enough to put this calamity behind it. As Graham Bishop, a London-based analyst, puts it: “The eurozone’s governance mechanisms seem only capable of achieving the barest minimum necessary to prevent an immediate meltdown”.

The structure and financing of the main bailout fund is the final source of concern. Called the European Financial Stability Facility (EFSF), the fund, launched last year, gained new powers at the summit to buy ailing countries’ bonds, extend preemptive credit lines to those suffering attacks by speculators in the bond market, and recapitalize troubled banks. German Chancellor Angela Merkel, trapped between her desire to save the euro and opposition at home to shoveling money into potentially bottomless pits on Europe’s fringe, had opposed expanding the fund’s powers. She finally agreed, yet made sure that each euro zone member could veto any bond purchase by the EFSF. 

In June Member States agreed to expand the EFSF’s money-raising ability to €440 billion, from €255 billion. This time around, Germany, the Netherlands, and Finland are signalling they won’t grant the fund more firepower, for fear of jeopardising their own AAA ratings. The bottom line: The key rescue fund for the euro zone has €323 billion to work with. It may need as much as €2 trillion.

Graham's Bishop's Book "The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?".

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