http://www.bloomberg.com/apps/news?pid=20601087&sid=azNNZZQK3AQI&pos=1 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 Greeceâs 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. âWe will defend the euro, whatever it takes,â European Commission President Jose Barroso told reporters early today after the leaders met in Brussels. Europeâs failure to contain Greeceâs 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 Unionâs central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details. âWhen the markets re-open Monday, we will have in place a mechanism to defend the euro,â French President Nicolas Sarkozy said. âIf you donât think thatâs significant, you havenât been to many EU summits.â Independent ECB Barroso said he wouldnât 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 âthe need for a clear, timely and strong response,â Canadian Finance Minister Jim Flaherty, who chaired the call, told reporters in Ottawa. âWe hope to see a strong, early policy response in Europe.â The spreading contagion also drew the attention of President Barack Obama, who said in Washington that U.S. regulators will examine the âunusual market activityâ 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 âa very clear signal against those who want to speculate against the euro,â Merkel said. Credit-Rating Authority With the euro regionâs 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 euroâs 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 blocâs Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poorâs wield too much power over investorsâ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said âsome of the points you have mentioned will be contemplated.â 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 âreaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.â Europeâs unprecedented lending pledge has âproven insufficient to stop market contagion to the rest of the euro- zone periphery,â Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit. âDifferent 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.â ************ 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.