By: Dr. Mike Campbell
The most precious commodity on the planet is not gold, diamonds or platinum, but market confidence. When confidence levels fall, the markets, currencies or bonds affected by loss of confidence will tank – this is the story writ large by the global financial crisis and it is a tale that has been told since the infancy of the capitalist system. If and investor has no confidence in a product, stock or bond, either they will simply not invest in it or the provider will have to make the rewards for doing so much more attractive to offset the perceived risk.
The acute phase of the European sovereign debt crisis dragged on for longer than was absolutely necessary because investors lacked the confidence that the Eurozone members and the wider EU would do what was needed to ensure that peripheral Eurozone economies would remain within the Euro and that the security of banks would be protected in the event of a sovereign default such that the dreaded fear of “contagion” could be avoided. The EU agreed that a financial “firewall” would be set up with the aim of ensuring confidence within the financial system. The idea was to provide a permanent replacement to the European Financial Stability Fund (EFSF) which was rapidly set up to help Greece, then Ireland and Portugal out of the financial pickle that they found themselves in. Critics always insisted that the fund was not large enough to meet the need of a major Eurozone economy, such as Italy or Spain (the third and fourth largest within the 17 member bloc).
This need has been addressed at a meeting of EU finance ministers in Copenhagen, Denmark, at the weekend. The successor fund to EFSF, the European Stability Mechanism (ESM) is to have its financial reserves raised from €500 billion to €800 billion (roughly $1 trillion).
The IMF has also agreed to provide funds should it be called upon to do so. "The IMF has long emphasised that enhanced European and global firewalls, together with the implementation of strong policy frameworks, are critical for ending the crisis and securing international financial stability," said IMF head Christine Lagarde.