Before Markets Reopen, a EU Fund to Stop Greek Crisis Spreading


Eurozone leaders plan to create a financial facility to defend the euro and create a pool of capital aimed at bringing down the interest rates its weaker economies pay for sovereign debt.

The problem may be that, like the funding for a Greece bailout, national leaders may not agree upon exactly what the new measures should be. According to Bloomberg, "leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before Asian markets open late tomorrow European time."

Few Options Available

Despite the desperate need for a firewall to slow soaring yields for Greek, Portuguese and Spanish debt and prevent the flow of capital to stronger economies like the U.S., the size of any capital pool may need to be huge. The speculation on the euro and the debt of certain nations has built as investors gamble on how much the insurance cost of sovereign paper should be. The cost of credit default swaps (CDS) for Europe's largest banks has also grown as fear that their balance sheets could be hurt by their holdings of Greek, Spanish, and Portuguese debt has also expanded.

Put simply, the eurozone faces the prospect of competing with global investors who think the situation in the region will get worse.

The European Central Bank and the financial ministers of its member nations have a modest number of options. They can directly buy sovereign debt from the weakest economies; buy debt or equity in large banks; make investments that will bring down the rate at which sovereign debt is insured; or, they can directly buy euros.

Eurozone Dilemma

It's unclear what the costs of slowing the panic about contagion may be. And to make matters more complex: Where will the money come from? Germany, Europe's largest economy, may be asked to cover some of the costs. The nation has already show great reluctance to bail out Greece at a cost equal to 1% of its GDP. That may be the end of its commitment because at some point, its outside investments will begin to affect the rates it pays to finance its own economy.

The eurozone nations probably believe that they have two choices. The first is to put up billions of euros to halt the currency's slide and back the interest rates that weak nations in the region pay for their sovereign debt. The other options is to let the problem work itself out, which risks the need for bailouts for Spain and Portugal. Those rescues would be much larger than Greece's.

It looks like the eurozone nations have no good choices.

Originally published