Is the Eurozone Crisis really over?

A plan announced on Thursday to address the Eurozone debt crisis has bouyed markets around the world. But questions remain if it will go anywhere near fixing the problem.

Eurozone leaders have formed an agreement with private banks and insurers to accept a 50 percent loss on Greek’s bonds. Long term, the aim is to cut Greece’s debt to GDP ratio to 120 percent by 2020. Despite Greece not being able to service it’s initial debts, this is not called a default. It’s also deemed to be voluntary as to not trigger any credit events (CDS). Bloomberg reports there are $3.7 billion in debt insurance contracts on Greece.

To help stabilise economies in the Eurozone, and in fact most of the world, the European Financial Stability Facility (EFSF) will be ‘leveraged’ up to 1 trillion euros and many European banks recapitalised. It’s this term again, ‘leverage’ that has caused so much concern. Ironically, it is in part what caused the GFC. The EFSF was first created in May last year, but it’s feared the fund is to small to be of any real assistance, so the plan is to leverage it by 4 or 5 times.

It’s not yet known how the leverage will be performed. Klaus Regling, the CEO of the European Financial Stability Facility flew over to Beijing after the deal was sealed on Thursday to gauge China’s interest in becoming a potential investor for EFSF bonds or investing into a Special-Purpose Investment Vehicle (SPIV). China Daily writes :

He said his conversations with Chinese officials were partly aimed at getting their preference, in order to find the “right structure” that would appeal to potential investors, adding the leverage mechanism would be “simple” and “transparent”, just like home mortgage loans.

ECB President Jean-Claude Trichet has said the eurozone sovereign debt crisis is not over – “The crisis isn’t over, but after the decisions made this week, I’m nevertheless confident that the governments will succeed in restoring financial stability,”. Only time will tell.

» Euro zone to leverage EFSF by 4 times to 1 trln euros – sources – Reuters, Wednesday 26th October 2011.
» Euro bailout chief says talks with China ‘productive’ – China Daily, Sunday 30th October 2011.


  1. Austerity has barely started.

    Maybe for financiers and other selet officials the crisis maybe cushioned. Austerity for the rest.

  2. The issue has everything to do with market sentiment. Amazing the “basket case” Greek economy only contributed about 2 percent to the Eurozone. All very irrational to suggest the Euro is dead thanks to the incompetance and dishonesty of Greek officials. As is the confidence in the over leveraged Australia economy. But markets are not rational

  3. So true BotRot. I also read a couple of weeks ago of Antonio Borges, IMF Europe director recommending changing economic policy away from austerity and back towards stimulus as the economy was plunging faster than expected. Guess they want Austerity measures, but also expect growth?

  4. @Tom “they” did not come to “us”.Julia was playing a game that many a dinky “Aussies” likes to hear, we are better than the rest. But Australia was never asked to contribute to the euro bail out. Why would they be? Given the massive private debt Australia has raked up to finance the housing price bubble I dont think “we” are in the position to bail out anyone!

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