Eurozone Bailout Fund Increased

BOSTON–(ENEWSPF)–October 28, 2011.  Negotiators in Brussels agreed on Wednesday to a large expansion of the bailout fund which eurozone member nations have set up in response to the sovereign debt troubles at the epicenter of the European portion of the global financial crisis.

The BBC provides background and news on the Eurozone crisis:

If economies are not growing, tax receipts fall, making it harder for governments to pay off their debts.  So far Greece, Portugal and the Irish Republic have received international help to deal with their crippling debt problems.  In July, eurozone leaders agreed a second bailout deal for Greece, and also agreed more powers for the European Financial Stability Fund to help countries struggling with indebtedness.  This allowed the fund to buy government debt (bonds), offer credit to nations in difficulty and created a special facility for recapitalising banks.

Wednesday’s development greatly increased the size of the EFSF bailout fund, from 440bn euros to 1tn euros.  This money comes from the richer countries, such as France and Germany, by way of taxpayer funds or inflation from the countries’ central banks printing money.  As a condition of their help, the donor nations insist on budget reforms in the countries who receive funds.  In Greece, this has resulted in austerity measures such as wage and pension cuts that have sparked sometimes violent protests.

With the complexity of today’s globally intertwined financial markets, the biggest fear of authorities is contagion, whereby a faltering bank or government causes a cascade of failures of other banks or governments who hold debt or other interests in the troubled entity.  In the United States, the taxpayer-funded TARP program and trillions of dollars in near-zero-interest loans made by the Federal Reserve have been used to prevent contagion.

This most recent eurozone deal has resulted in some losses and concessions from the banks and countries which hold troubled assets.  Banks and creditor nations have agreed to swap old bonds the Greek government has little hope of repaying for replacement bonds that pay less interest.   In addition, banks will be forced to raise additional capital to reduce their risk of failure in the event of a future contagion.

Like many of the deals reached in recent years around the world, these agreements represent enormous sums of money, yet few people understand where it’s coming from or going to, and most decisions are made behind closed doors by negotiators from banks, central banks, and the national treasuries.  Protesters from the streets of Greece to the encampment of Occupy Boston are demanding greater transparency in such deals, and greater consideration of how people will be affected, rather than worrying only about saving banks which have chosen to make risky loans.