EZ Leaders’ Emergency Rescue Plan: Is It Enough?

Last Thursday we saw sharp rallies of high-yielding assets when the euro zone leaders emerged from their emergency Economic Summit and presented concrete plans regarding the region’s ginormous debt crisis. The question is, are their plans enough to ease investors’ fears?

One of the most important topics of the meeting (if not the most important) is the set of details on Greece‘s second bailout package. Recall that last month the Greek government had fulfilled its part of the bargain to pass a new round of austerity measures in exchange for additional bailout money.

According to the EU leaders, Greece will receive an additional 109 billion EUR from the EFSF and an estimated 50 billion EUR from the private sector. The new figure doesn’t include the 45 billion EUR that hasn’t been released from the first Greek package which started last May. Using the additional money Greece is expected to recapitalize its banks, buy back its own debt in the markets, and finance its deficit.

The EU leaders have also made it easier for Greece to acquire more loans. Apparently, the interest rate on the new European Financial Stability Fund (EFSF) loans is now down from around 4.5% to only 3.6%. Looks like shops aren’t the only ones offering a mid-year sale!

EZ leaders bring out the big guns

Speaking of mid-year sale, you should know that Greece isn’t the only economy that is being offered the interest rate deal. Even before the meeting, concerns for the other PIIGS nations also rattled the news wires and made euro investors skittish. As it is, Portugal and Ireland will also enjoy the lower interest rates so they could have a better chance at debt sustainability.

Another nugget that you should take away from the announcement is the increased scope of the EFSF. Instead of just being a piggy bank for the region, the EFSF now has the power to intervene in the secondary bond markets of the euro zone countries every time the ECB sees a need for it. The move will not only help keep economies such as Spain and Italy from being shut out in financial markets, but it will also help in the recapitalization of banks and other financial institutions in the region.

Too bad the euro zone leaders failed to provide additional details on this particular plan. You see, many analysts believe that if the euro zone leaders should’ve increased the region’s 440 billion EUR commitment to the fund when they increased its scope. After all, how can it fulfill its additional obligations if it has to make do with the same budget?

Still, judging by the price action of the euro and the other high-yielding currencies, the emergency plan was generally met with approval. Heck, the yield on two-year Greek bonds dropped by a monstrous 600 percent down to 27.6% on that day! EUR/USD even broke the 1.4200 resistance level and eventually finished the week near the 1.4400 handle.

Unlike the ending of the Harry Potter saga though, not all is well just yet for the region. For one, ratings agency Fitch greeted the plan with a temporary credit rating downgrade yesterday, saying that Greece’s new package involves a debt exchange that would bring a 20% net present value loss to the holders of the Greek government debt. Though the downgrade is only good until Greece could issue new replacement bonds, the move is enough for investors to worry that other ratings agencies like Moody’s and S&P might follow suit.

Other criticisms of the plan include the additional burden of the bailout funds on the taxpayers, as well as the possibility that ECB President Trichet and his gang are just kicking the can down the road. I mean, what guarantee do we have that giving access to even more debts would work on the already financially troubled Greek, Irish, and Portuguese economies?

Maybe we’ll know more details about the emergency plan when the euro zone leaders meet up for a couple more times next week. In the meantime, do you think that the EZ leaders have planned enough to solve the region’s debt problems, or are they merely delaying the problem? Send out your thoughts on the boxes below, or on my Twitter and Facebook accounts!

  • Bonbez86

    U guys are so bias. Enough with the EZ problem.
    What about the US debt problem? Do you have anything to comment on that?

    • Joshua Pearce Gibson

      Well, we’ve got a massive policy change out of the EU, including official publications on what they’re going to be doing with the EFSF and whatnot.

      Is there something new to report on out of the US? Some attitude change we’re not aware of? Has a solution to the debt limit been agreed to?

      If not, then there’s really no ‘new news’ to make a post about, is there?
      But, if you really NEED to have your fix, Currency Currents seems to be touching base on some US-centric things.

  • Anirudhs1985

    Hi Gump

    Can u r someone else explain me about the “High Yielding Assets” u have mentioned in the post to help me understand

    Ani

    • Forex Gump

      Thanks for reading my blog, Ani!

      In this case I’m talking about high-yielding currencies such as the euro, Aussie, and the other comdolls that yield higher interest rates than the dollar, yen, or the franc.

      Sometimes their price action is determined by the level of risk that investors are willing to take. To know more about this topic, you could check out the “barometer of risk” section of the school:
      link to ow.ly

      Hope this helps :)