Foreign Policy Blogs

EU Announces $1Trillion Debt Crisis Bailout



The video clip above is from a recent Great Decisions discussion with Christine LaGarde, the French Finance Minister. I include it because she outlines a clutch of sensible regulatory reforms that she is managing in France, and for which when France assumes the EU chairmanship next year, they intend to push the same reforms for the Eurozone.  Among her policy prescriptions is the need for greater transparency, rational limits on executive compensation and a more globally inclusive body of regulators overseeing the global financial architecture. If I had to make an analogy, I would say she is the Elizabeth Warren of Europe — politically savvy, tough, progressive, highly intelligent with a common touch. She’s been on my radar screen since she assumed the role under Sarkozy, but she has only recently been coming into her own. I like her and I think we need more regulators like her.


In an extraordinary session that lasted into the early morning hours on Monday, European leaders, pressured by sliding Markets and doubts over their ability to act decisively, agreed to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the Greek debt crisis that has engulfed Europe and threatened markets around the world. This is an important signal by the Europeans after initially waiting way too long before deciding to confront the debt crisis in Greece. It was their failure to act that spooked the global markets last week with a ‘Flash Crash’ in Eurpran, Asian and U.S. Markets. The action was welcomed by mildly rebounding world Markets in subsequent days.


eu-finance-ministers-re-greece1“We are going to defend the Euro,” Spanish Economy Minister Elena Salgado emphatically told reporters as she arrived to chair the meeting yesterday. “We think we have a duty for more stability for our currency. We will do whatever is necessary.”  Europe’s failure to contain Greece’s fiscal crisis triggered a 4.1% drop in the Euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. It prompted the U.S. and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession.  Asian stocks, U.S. index futures and the Euro surged as European policy makers unveiled a loan package worth nearly $1 trillion and a program of securities purchases to end a sovereign-debt crisis.


Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008. The package represented an audacious step for a bloc that had been criticized for acting tentatively, and without unity, in the face of a mounting crisis.


Underscoring the urgency of the situation, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. And in a sign of the spreading anxiety, the United States Federal Reserve, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced the establishment of instruments known as swap lines. The swaps are intended to ease pressure on European banks and money markets; in essence the Fed will be printing dollars and exchanging them for Euros to provide more liquidity.  The actions by the United States represented a significant concern that the European crisis could spill over and hinder the American recovery. 


In addition, the European Central Bank announced after the deal was completed that it would intervene in the government and corporate bond markets, also to provide liquidity.  Meanwhile, Markets in the Asia-Pacific region rose early on Monday. The leading indexes in Japan and South Korea both rallied about 1.3%  soon after the deal was confirmed, recouping some of the losses they had suffered last week. The Hang Seng index in Hong Kong, gained 1.3%  soon after the open. In Australia, the benchmark S&P/ASX 200 climbed 2.1%.  The markets in Singapore and mainland China also opened higher.


NYT: Federal Reserve  Joins Bailout Effort in Euro Debt Crisis


New political complications in two of Europe’s most important countries added to the challenge faced by the finance ministers as they met to find a solution. In Germany, voter anger at the effort to save Greece cost Ms. Merkel an important regional election Sunday, undermining her leadership, and in Britain, the government remained in a state of suspended animation because of the inconclusive Parliamentary elections last week.


The package comes at a time of mounting financial unease. Riots in Greece, ever-tightening terms of credit and the unexplained free fall in the American stock market last Thursday have compounded the sense that the European Union’s inability to address its sovereign debt crisis might lead to the type of systemic collapse that followed the fall of Lehman Brothers.  Olli Rehn, the European commissioner for monetary policy, described the arrangement as “a consolidation pact” that would be “particularly crucial for countries under speculative attacks in recent weeks.” He specifically mentioned Portugal and Spain.  Mr. Rehn said the I.M.F. would provide “half as much as the European Union” following lengthy talks with fund officials.  “We shall defend the Euro whatever it takes,” Mr. Rehn said.


What emerged from the discussions represented a partial retreat from a system discussed earlier in the day that would have radically expanded the powers of the European Commission to raise funds.  Instead the ministers came up with a system that would speed up the pace at which states that use the euro currency could lend to one another, but on a bilateral and voluntary basis.  One of the crucial decisions that ministers made was to create what they called a “special purpose vehicle” to disburse the 440 billion Euros in new loans, should that support be required by member states in economic difficulties.


The use of such a financial instrument reflected the difficulties that individual European governments — and Germany’s in particular — had in committing huge sums to a central authority. Having a body like the European Commission oversee the economic management of the bloc was seen by some countries as a clash with national sovereignty.  In a statement following their meeting, the ministers emphasized that the special purpose vehicle would expire after three years and that its use would be strictly dependent on “national constitutional requirements.”


Finance Ministers said their first line of defense against financial turmoil was to offer loans of 60 billion Euros to member states in need, and to use the further loans of up to 440 billion Euros as a “complement” as required.  While the sums being discussed are eye-catching, some bankers questioned whether they would be enough to calm the markets over the long term. One banker said that . . .  

Read more here, and here.


Source:  NYTs, WSJ and Bloomberg           Photo:



Elison Elliott

Elison Elliott , a native of Belize, is a professional investment advisor for the Global Wealth and Invesment Management division of a major worldwide financial services firm. His experience in the global financial markets span over 18 years in both the public and private sectors. Elison is a graduate, cum laude, of the City College of New York (CUNY), and completed his Masters-level course requirements in the International Finance & Banking (IFB) program at Columbia University (SIPA). Elison lives in the northern suburbs of New York City. He is an avid student of sovereign risk, global economics and market trends, and enjoys writing, aviation, outdoor adventure, International travel, cultural exploration and world affairs.

Areas of Focus:
Market Trends; International Finance; Global Trade; Economics