EU to Set Up Fund to Prevent Spread of Greek Crisis

Discussion in 'Economics' started by m22au, May 7, 2010.

  1. m22au


    EU to Set Up Fund to Prevent Spread of Greek Crisis (Update1)

    By James G. Neuger and Gregory Viscusi

    May 8 (Bloomberg) -- European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro.

    Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before the markets open on May 10.

    “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels.

    Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid to prevent a global sovereign-debt crisis from pitching the world back into a recession.

    European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details.

    “When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.”

    Independent ECB

    Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure.

    With the euro facing its stiffest test since its debut in 1999, the summit -- called to discuss longer-term efforts to coordinate economic policies -- turned into a crisis-management session that dragged past midnight.

    The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18.

    The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.

    Spreading Contagion

    Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs yesterday. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty, who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.”

    The spreading contagion also drew the attention of President Barack Obama, who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back.

    In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s.

    Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said.

    Credit-Rating Authority

    With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets.

    Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments.

    Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.”

    The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens.

    Biggest Contributor

    Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line yesterday with endorsements in the lower and upper houses of parliament. A group of German academics filed a lawsuit to try to halt the payout.

    A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.”

    Europe’s unprecedented lending pledge has “proven insufficient to stop market contagion to the rest of the euro- zone periphery,” Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit. “Different kinds of solutions are necessary to fix the underlying problems of the rest of the euro periphery other than Greek-style packages, and these are unlikely to come in the very short term.”


    My comment:

    I'm confused how a fund that is funded by the EU can provide support for the EUR. Yes this fund (still waiting on details) could help to prevent debt defaults, yes this fund could mean that economic contraction in Europe isn't as severe as it could be.

    However in my mind, any additional borrowings by EU constituent countries is EUR negative in the medium and long term.

    Yes there could be an initial spike on Monday once the details are available, but you only need to go back to Monday 3 May to see what happened to the EUR after an initial spike following the announcement of the Greek bailout package.
  2. Well, he's certainly painted himself into a corner - saying "We will defend the Euro, whatever it takes."

    If the Euro ever breaks through the recent lows, it will then become clear that no one can stop it.
  3. Stok


    EU and ECB and the Euro are DOOMED.

    Germany wishes they had their Deutsche Mark back.

    Even thou the UK is upside down, they kept the Pound.
  4. m22au


    French President Nicolas Sarkozy Vows to "Confront Speculators Mercilessly" via Secret Plan he cannot Reveal

    Every time officials in Europe starts yapping about containing the European debt crisis, the market makes complete fools of them. The latest comments from French President Nicolas Sarkozy may take the cake.

    Please consider a few snips from the New York Times article Europeans Move to Head Off Spread of Debt Crisis

    "Leaders from the euro zone countries signed off on a support package for Greece on Friday night and pledged to take steps to stanch a spreading debt crisis before markets opened on Monday morning.

    "During a late-night meeting at European Union headquarters, the leaders described the debt crisis as “systemic,” but President Nicolas Sarkozy of France insisted that the bloc could defend the euro by directly attacking speculators.

    "Speaking at a news conference, Mr. Sarkozy vowed to “confront speculators mercilessly” and warned them that they would soon “know once and for all what lies in store for them.”

    "The leaders said they would create a so-called European stabilization mechanism, but Mr. Sarkozy declined to give details of the plan on the basis that doing so could undermine its effectiveness.

    "He said that all 27 European Union finance ministers would hold an emergency meeting on Sunday afternoon to draft the plan to quell gyrating markets ahead of Monday."

    Secret Plans

    So, Sarkozy has secret plans to “confront speculators mercilessly”. However, nobody can know what they are, or the plans won't work.


    Flashback 1720: South Sea Bubble

    "Among the many companies to go public in 1720 is—famously—one that advertised itself as "a company for carrying out an undertaking of great advantage, but nobody to know what it is"."

    Please click on the above link. It is fascinating to read how history repeats time and time again, and how politicians are always in on it.

    The South Seas bubble even ensnared Sir Isaac Newton who managed to lose a fortune on it, saying "I can calculate the movement of the stars, but not the madness of men".
  5. Of course, what Sarkozy did not say was that France follows Italy down the hole...they are already in violation of the debt-GDP ratio.

    All good theater ....the inevitable is around 2 years if left alone...screw around like this and it reduces the time...

    Loans guaranteed by sovereign bonds, eh....not worth the paper they are written on....

  6. TGregg


    LOL. Put a fork in it, this thing is done. The Greek default is all but guaranteed.

    Secret Plan! LMAO! They really think most of the planet is freakin' retarded. HTF do you go in front of people and say "secret plan" with a straight face?

    But it came from the French President, so no surprises really. You can check out <A href="">what happened</a> to the last guy. Not a pretty picture. Funny, hilarious even, but not pretty.