Friday, December 17, 2010

Euro Crisis: What Happened at the European Summit

Our breathless story continues. They held the European Summit in Brussels and everybody showed up, at least according to Walker & Forelle's article on today's Journal website.

Did they solve the crisis? Well, they did endorse a plan for a new bailout fund to replace the one expiring in 2013 and proposed treaty changes, but somehow that didn't calm the markets. Spain had to offer very high interest rates on its Thursday bond offerings. As mentioned before, Greece and Ireland had to accept bailout funds, which means they now take marching orders from the European Union and the IMF (International Monetary Fund). Portugal is next in line.

The European Central bank tried to reassure the markets.:

[It] said it will nearly double its capital base--a move analysts see as a strong signal to government leaders that the central bank's loans to banks and its purchases of government bonds of the regions weakest economies carry a risk. The added capital comes through a transfer of assets from each of the euro zone's 16 national banks.

Details are sketchy, but the new fund will probably run along the lines of the old one, about 750 billion euros ($992 billion). The proposed treaty will have to be agreed upon by each of the 17 members of the Eurozone. At least the language is simple. It consists of two sentences:

[I]t permits the Eurozone countries to establish a "mechanism" if "indispensable" for the health of the Euro.

That's kind of vague and broad. Shades of "systemic risk"? Or "too big to fail"? In the case of "too big to fail", the implication is that the U.S. Fed will back risk with its full faith and credit. Is this treaty language similar? What defines "indispensable"?

Zone countries need to raise about $2 trillion in 2011. To quote, "If Europe's governments fail to put their bickering aside, they risk triggering the unthinkable, the implosion of the Euro", evoking painful memories of past financial crises.

I am not writing this to encourage speculation on the downfall of the euro. I do not enjoy vultures feeding on carrion. I really want to see a solution to a very complicated, unprecedented problem.

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