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EU Approves 500B Euro Debt Measures

EU finance ministers have pledged to do "whatever it takes" to underpin the sinking euro currency. (AFP: Georges Gobet)
EU finance ministers have pledged to do “whatever it takes” to underpin the sinking euro currency. (AFP: Georges Gobet)

Peter Ryan
Sunday May 9, 2010

European Union finance ministers have agreed on a rescue deal worth more than 500 billion euros ($717 billion) to stop the financial crisis in Greece from spreading to other fragile EU economies.

In an emergency meeting, EU finance ministers pledged to do “whatever it takes” to underpin the sinking euro currency and to prevent a second phase of the global financial crisis.

The enormity of the combined guarantee mechanism is reminiscent of the global emergency leading up to the collapse of Lehman Brothers in September 2008.

In total, 720 billion euros is standing by to underwrite the sinking euro currency – now at a 14-month low against the US dollar – and potentially some of the debt of struggling EU member nations.

As he arrived at today’s emergency summit, Swedish finance minister Anders Borg summed up the fears of a widening global crisis if a deal was not reached [how similar does this sound to what the US said for their bailout?].

“We now see herd behaviours in the markets that are really pack behaviours, wolf pack behaviours, and if we will not stop these packs they will tear – even if it’s self-inflicted weakness – they will tear the weaker countries apart,” he said.

The aim was to strike a deal before markets opened in Asia this morning and with the clock ticking, the ministers made a deal about 2:30am Brussels time.

Spanish finance minister Elena Salgado delivered the news to breathless financial markets.

“It shows the decision that we are placing considerable sums in the interests of stability in Europe,” she said.

The EU’s monetary affairs commissioner Olli Rehn underscored the reality that Greece was now a sideshow to a much wider problem with global implications.

“This is not only about Greece but about the financial stability over the European Union as a whole,” he said.

“The finance resistance by the commission and by the member states and the actions taken today by the ECB [European Central Bank] proves that we shall defend the euro, whatever it takes.”

Broken down, the potential cash fire represents 440 billion euros from 16 Euro governments, 60 billion euros from the EU and a further 220 billion euros from the International Monetary Fund.

Mr Rehn says the rescue deal will underpin Spain and Portugal, which could follow Greece into crisis.

“This is particularly crucial for countries that have been under speculative attacks in recent weeks,” he said.

“They need to take action now and in this sense I’m satisfied to know that Portugal and Spain have expressed their clear commitment to take significant new measures.”

Market relief

The guarantee had an immediate impact on the euro, which rose more than 0.5 per cent against the US dollar.

The price of crude oil jumped and futures trading for Wall Street pointed towards a positive opening for the first time in a week.

In Australia, the All Ordinaries Index rose 1.6 per cent, despite earlier predictions of another dismal day.

Westpac’s chief economist, Bill Evans, says today’s emergency action has put a credit crisis on hold for the time being.

“This has really settled things down. It’s indicating that the credit crunch that we thought may have been starting in Europe has been short-circuited at this stage,” he said.

But will the EU’s intervention be enough to save the euro? Currency strategist Boris Schlossberg is still worried.

“There’s so much fracture going on in the Union that there’s a very serious risk for the first time since it’s been created of real fragmentation in the eurozone, of the euro possibly blowing up as a currency,” he said.

“That certainly is something that I think none of the European leaders want to see.”

Mr Schlossberg says that in addition to the euro, the EU needs to take a firmer stance on underwriting sovereign debt repayments.

“We have a huge amount of maturity coming up in Italy, in Spain, and all of those debts are going to start to really begin to impact on the market, unless there is some sort of facility to be able to refinance that debt perhaps internally,” he said.

“So ultimately I think the market really needs to see that the ECB is going to monetise some of this debt in order to be fully reassured that they can control this issue.”

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