ECOFIN Meeting: Three Possible Outcomes

The euro zone is making headlines in markets again, and this time its finance ministers are on the hot seat. In their 2-day meeting that started yesterday, they will attempt to reach an agreement that will help pull the region out of its debt mess. Here are 3 popular predictions on the outcome of the meeting:

Option 1: Increase the size of the European Financial Stability Facility (EFSF)

One of the more popular outcomes is the possibility of increased budget for the EFSF. Recall that in May 2010, the European Union set up the fund in order to aid the euro zone economies in times of economic trouble. The initial size of the fund was 440 billion EUR, but was toned down to 250 billion EUR so the region could keep is AAA credit rating.

Good thing that Jean-Claude Juncker, Chairman of the euro zone finance ministers recently said that they are looking at several ways to make the original 440 billion EUR available. If this happens, the market will most likely take a breather from the euro-selling sessions because a higher fund means that the region has more capacity to take on the debts of the other troubled economies like Portugal or Spain.

Of course, a higher budget doesn’t come without its price. As Cyclopip once said, “There’s no such thing as a free bunny.” For one, Germany will be holding key elections in a couple of weeks, and the German crowd ain’t too happy about the country giving up too much money.

Many market gurus are also saying that the finance ministers are willing to increase the size of the fund on the condition that the troubled economies implement more economic reforms and steeper budget cuts. This might be a good assurance for the public in the near future, but it could also weigh on economic growth.

Option 2: Lower interest rates for emergency loans

This proposal was made by Irish Finance Minister Brian Lenihan, who cited that Ireland is already struggling with tough budget cuts just to be able to afford the interest rate on the EU emergency loan package. If the interest rate was lowered, the Irish government probably wouldn’t have such a difficult time making ends meet.

What’s great about this option is that it wouldn’t involve any new legislation to be passed, which means that it could be implemented without much fuss and delay. Aside from that, it wouldn’t require euro zone nations to put more money on the table. Not a bad idea, don’t you think?

The downside is that, since emergency loans would be made more affordable, this could encourage debt-ridden nations to just give in to bailouts instead of trying to work out their deficit problems on their own. Besides, even though the interest rates are lowered, it still doesn’t guarantee that the borrowing nations would be able to pay back their loans in the future.

Because of that, if the finance moguls over at the euro zone decide to go with this option, it probably wouldn’t be of much help to the euro zone and the euro. In order for debt problems to be out of the picture, what they need is a lasting solution and not a temporary fix.

Option 3: Use the classic wait-and-see approach

Last, but certainly not least, there’s also the possibility that euro zone finance ministers will just keep chillin’ like ice cream fillin’ ahead of the European Union leaders’ meeting on February 4. With the European Commission and the ECB‘s efforts in convincing Germany to fatten up the EFSF likely to end up in vain, it’s not hard to imagine this happening.

Earlier this week, German Finance Minister Wolfgang Schäuble advised everyone to take a chill pill. He said that there is no immediate need to shed out more money. After all, weren’t the Spanish and Portuguese bond auctions successful, ja?

Eurogroup chairman Jean-Claude Juncker didn’t give any promising remark about the meeting either. He only pinky swore that they would agree on a decision as soon as possible.

If conflicting interests keep finance ministers from coming up with nothing more than just a piece of paper with a list of possible options, there’s a good chance for the euro to end up in the bear lair. I mean, what would this imply other than the lack of cooperation among the members to straighten up the region’s balance sheets?

However, the market could also take it easy on the shared currency. Then the pressure will be back on when the political leaders meet up in February.

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What do you think these European economic hotshots will do? If you’re planning to trade the euro, I think what’s more important than what they decide on is whether or not they’ve gotten a step closer to creating a concrete, permanent fix to the region’s debt crisis.