EU Proposes $928 Billion Crisis Aversion Plan...It's About Time!

http://leverageacademy.com/blog/2010/05/09/europe…

After months of avoiding the debt refinancing troubles of Greece, the European Union came together this weekend in a crisis summit to address the falling Euro and credit malaise in the EU. Describing short investors as a "wolf pack" plaguing the continent, ministers vowed to counter financial markets from causing the Greek debt crisis from spreading. The plan offers $805 billion (600 billion) to the continent (440 billion euros from EU, 100 billion from IMF, 60 billion Euro stabilization fund) for crisis measures. This comes after the IMF approved a 30 billion Euro bailout for Greece today.

If the IMF commits 220 billion Euros, the plan could reach $928 billion!

Why 600 billion Euros at the outset? European economists predict that if Ireland, Portugal, and Spain eventually come to require bailouts similar to Greece's, the total cost could be some 500 billion euros.

Let's avoid another Lehman Brothers...

Greece

According to Reuters, "European Union finance ministers on Sunday promised to counter the "wolfpack" of the financial markets as they sought agreement on a 600 billion euro ($805 billion) plan to keep Greece's debt crisis from spreading.

The compromise measure under discussion included loan guarantees by euro zone countries worth 440 billion euros, a 60 billion euro stabilization fund and a 100 billion euro top-up of International Monetary Fund loans, EU sources said.

Financial markets have been punishing heavily indebted euro zone members, threatening to plunge them into Greece's plight. The safety net being assembled was meant to protect other countries with bloated budgets, such as Portugal, Spain and Ireland.

Jitters over euro zone finances have set global markets on edge, and provided a backdrop for a nearly 1,000-point drop in the Dow Jones industrial average on Thursday, whose trigger remains a mystery.

Hopes the EU package would successfully tackle the crisis helped lift the euro, which gained almost 2 percent against the U.S. dollar and 3 percent on the yen in early Asia trade. U.S. stock futures also surged at the start of trade on Sunday.

Moving swiftly to bolster Greece and instill some confidence in shaky markets, the IMF approved a 30 billion euro rescue loan as part of a broader combined EU-IMF bailout for the country totaling 110 billion euros. The IMF said 5.5 billion euros from the three-year loan would be disbursed immediately.

To secure the funds, Greece has committed to budget-cutting measures so sharp that they have already caused violent protests.

"Today's strong action by the IMF to support Greece will contribute to the broad international effort underway to help bring stability to the euro area and secure recovery in the global economy," IMF Managing Director Dominique Strauss-Kahn said in a statement.

'WOLFPACK BEHAVIORS'

But whether the coordinated international actions would settle global markets, which have been roiled in recent days, remained to be seen. Policymakers around the globe have become worried about the knock-on effects should the crisis spread.

"We now see ... wolfpack behaviors, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart," Swedish Finance Minister Anders Borg told reporters in Brussels as he arrived for the EU meeting.

Britain's finance minister Alistair Darling stressed the need to stabilize markets, while ministers from France, Spain, Finland and other euro zone states vowed to defend their shared currency.

U.S. President Barack Obama and German Chancellor Angela Merkel spoke by phone earlier on Sunday about the importance of EU members acting to build confidence in markets.

Economists estimate that if Portugal, Ireland and Spain -- three other heavily indebted euro zone countries -- eventually come to require bailouts similar to Greece's, the total cost could be some 500 billion euros.

As details of the financial barriers that the EU was putting up to ward off speculators against Greece and other debt-laden countries became public, G20 finance officials held a teleconference to discuss the crisis.

Last week, fears that a euro zone debt crisis could rock banks and the global economy like the September 2008 collapse of U.S. bank Lehman Brothers swept through markets, pushing global stocks to near a three-month low. It was unclear whether the EU crisis package would stem the tide.

"All in all this is good news, but it is unlikely in itself to calm markets; it's all too 'slow-burner' stuff," said Erik Nielsen, chief European economist at Goldman Sachs. He said he expected the European Central Bank would soon need to take some type of emergency action.

EU sources said ECB governors met to discuss the crisis, but no details were available.

MARKET TURMOIL

The 16 nations that use the single currency have been criticized for contributing to market uncertainty by responding too slowly to the crisis in Greece.

An IMF board source told Reuters that some board members had shared those concerns and raised worries that the crisis could spread to other euro zone countries.

A euro zone summit last week asked for a European stabilization mechanism.

Some economists said the move was welcome, but that it would cure the symptoms, rather than the disease.

"By putting in place additional safeguards for the euro area financial system, governments finally appear to be rising to the challenge of the sovereign debt crisis," Morgan Stanley said in a research note to clients.

"But, like the measures taken before -- for the benefit of Greece -- a stabilization fund is just buying time for distressed borrowers," it said."

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Comments (15)

  • Anonymous Monkey's picture
  • Anonymous Monkey
  • Rank: Chimp
May 9, 2010 - 10:43pm

I just read on Bloomberg that the ECB will intervene in bond markets to prevent further Euro deterioration. What I don't understand is if they choose to buy these bonds, they will pay for them in Euros, increasing the money supply, essentially monetizing the debt. Yet, the EUR rallies on this news. Please correct me if I am wrong and ECB intervention will not require debt monetization.

May 10, 2010 - 4:21am
FXTrading:
I just read on Bloomberg that the ECB will intervene in bond markets to prevent further Euro deterioration. What I don't understand is if they choose to buy these bonds, they will pay for them in Euros, increasing the money supply, essentially monetizing the debt. Yet, the EUR rallies on this news. Please correct me if I am wrong and ECB intervention will not require debt monetization.

Read up on what a sterilized intervention is.

750B Euros for 3 more years of a common currency? Hardly seems worth it...

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May 10, 2010 - 11:32am
youngmonkey:
Markets are just loving this right now

Which is a nightmare for long term investors. We're manufacturing a market by governments trying to control it.

Greece should have been allowed to default, just like AIG and GM should have been allowed to go under.

Sometime in the next three years there is going to be a REAL recession because of all these bail outs, I'm talking a DOW at 5,000 pts kind of drop.

I'm going to Mars.

Ps, do you work at CS?

May 10, 2010 - 9:37pm

Euro is down again, very bearish for commodities. If the EU lags in GDP growth by 1.5-2.0%, there is a strong possibility that the Euro continues its downward spiral. This would actually be good for nations such as greece, italy, spain, portugal, and ireland. It would make them very competitive in their exports.

May 10, 2010 - 10:30pm
BankingRUs9:
Euro is down again, very bearish for commodities. If the EU lags in GDP growth by 1.5-2.0%, there is a strong possibility that the Euro continues its downward spiral. This would actually be good for nations such as greece, italy, spain, portugal, and ireland. It would make them very competitive in their exports.

No, no it wouldn't "actually be good" for them. Their cost of funding will blow through the roof wayyyyy before any marginal benefit of a stronger export sector.

Econ 101 is great, but the reality is that it's more of an accounting issue at this point.

May 12, 2010 - 7:02pm

This is make or break for the EU. I'm glad this will force more integration, at last (or a break-up of the Eurozone, hmm).

As for the J-curve, the only one I know is Davies'.

May 12, 2010 - 7:36pm

You are right, short term implications would be funding costs through the roof, but would hopefully balance out in a few years (J curve). Ireland pulled a comeback after its deep recession years ago by attracting multinationals with cheap, educated labor. Now I know I am going to get the "why not just go to india" rebuttal.

May 12, 2010 - 8:04pm

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