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Euro Debt Crisis
There have been some countries in the Euro, the most publicised being Greece, which have been guilty of spending more that they make. This escalated last week when the ratings agency Standard and Poor’s slashed their sovereign debt rating to just above “junk” status saying investors would be lucky to get 30-50% of their investment back. This saw the cost of Greece debt escalate through the roof which in turns means they would be struggling to pay their interest bill yet alone reduce the level of debt.
On April 11th the IMF and Euro countries announced a €45 Billion fund to renegotiate all debts maturing this year at “kinder” interest rates. However what about subsequent years? On 2nd May the euro-zone governments and the IMF set out the terms of a €110 billion rescue for Greece which depended on Greece accepting harsh austerity measures which resulted in riots and unfortunately a loss of life in Greece. This was not enough to settle investors’ nerves.
The main concern for investors “globally” is the risk of contagion that such fears would spread to other Euro countries such as Portugal, Spain, Italy and Ireland. This would result in their bond markets freezing up and we would be faced with similar scenario as to the credit crunch the global economy has spent the last 18 months pulling itself out of. The interests of “Euro” investors is a little more obvious. Of the estimated €164 Billion of Greek debt around 72% of this is held by Euro nations with Germany holding about 32% of total debt. This on top of the fact they all have the same currency, The Euro, this means pragmatically that any bailout is really bailing themselves out. The reason it has taken so long has been a number of issues including political posturing as Germany had an provincial election last week and the German people were very anti the Greek bailout.
European policy makers have now unveiled an unprecedented loan package worth nearly €1 trillion and a program of bond purchases in an attempt to stop a sovereign debt crisis that threatened to shatter confidence in the euro. Under the loan package, euro governments pledged €440 billion in loans or guarantees, with €60 billion more in loans from the EU’s budget and as much as €250 billion from the International Monetary Fund. As EU rules don’t allow direct central bank lending to governments, the European Central Bank said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will smooth markets and the cost of funds but they won’t increase the overall money supply in the financial system.
This new package could also be applied to other countries in the Euro should they experience difficulty but given the coordinated effort from the Euro nations and the IMF this should go a long way to thwarting potential speculators trying to instigate further “excessive” action in these debt markets.
Markets can then move onto their next point of “interest”.
On April 11th the IMF and Euro countries announced a €45 Billion fund to renegotiate all debts maturing this year at “kinder” interest rates. However what about subsequent years? On 2nd May the euro-zone governments and the IMF set out the terms of a €110 billion rescue for Greece which depended on Greece accepting harsh austerity measures which resulted in riots and unfortunately a loss of life in Greece. This was not enough to settle investors’ nerves.
The main concern for investors “globally” is the risk of contagion that such fears would spread to other Euro countries such as Portugal, Spain, Italy and Ireland. This would result in their bond markets freezing up and we would be faced with similar scenario as to the credit crunch the global economy has spent the last 18 months pulling itself out of. The interests of “Euro” investors is a little more obvious. Of the estimated €164 Billion of Greek debt around 72% of this is held by Euro nations with Germany holding about 32% of total debt. This on top of the fact they all have the same currency, The Euro, this means pragmatically that any bailout is really bailing themselves out. The reason it has taken so long has been a number of issues including political posturing as Germany had an provincial election last week and the German people were very anti the Greek bailout.
European policy makers have now unveiled an unprecedented loan package worth nearly €1 trillion and a program of bond purchases in an attempt to stop a sovereign debt crisis that threatened to shatter confidence in the euro. Under the loan package, euro governments pledged €440 billion in loans or guarantees, with €60 billion more in loans from the EU’s budget and as much as €250 billion from the International Monetary Fund. As EU rules don’t allow direct central bank lending to governments, the European Central Bank said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will smooth markets and the cost of funds but they won’t increase the overall money supply in the financial system.
This new package could also be applied to other countries in the Euro should they experience difficulty but given the coordinated effort from the Euro nations and the IMF this should go a long way to thwarting potential speculators trying to instigate further “excessive” action in these debt markets.
Markets can then move onto their next point of “interest”.
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