By: Mike Campbell
The substantial losses seen last week on stock exchanges around the world have largely been reversed following the release of details of an EU plan to prevent “contagion” from the Greek debt crisis affecting other EU countries. The agreement was thrashed out over the weekend and provides an emergency fund worth
€750 billion which is intended to remove the threat of the Greek debt crisis spreading to other Eurozone countries, notably Portugal and Spain. The International Monetary Fund (IMF) is also expected to chip in another €250 billion.
One of the first actions taken after the package was agreed was that European central banks started to buy government debt issued by the countries seen at greatest risk. The move has seen the yield on the Greek two year bond slashed from 18.1% to a much more reasonable (but still expensive) 4.9%. The move is a separate development from the €110 billion Eurozone/IMF safety net that has been agreed to help Greece out of its current debt crisis.
The size of the European fund has taken markets by surprise. There had been considerable concern that the Eurozone response to the Greek crisis had often been seen as “too little, too late” and the market was not convinced of the seriousness of the Eurozone intent. This new move seems to have assuaged those concerns. It does nothing to tackle the reduction of sovereign debt within the Eurozone, but it should mean that nations can service their debts at more reasonable cost and ought to support the value of the Euro. The EU Commission has repeated its belief that progress needs to be made on regulating the financial system, in particular with respect to derivatives and the role of rating agencies.