Euro debt package starting to take shape

Currencies Direct October 27th 2011 - 2 minute read

Eurozone leaders once again put off decisive action to the region dent problems leaving the markets to trade and rumours and comments. The crisis, which threatens to throw the world into a new recession, has been the only subject of note for traders and investors as the markets remain volatile, but over a small range. The summit, between 17 euro nations, led to the agreement that the bailout fund would be leveraged up to EUR1 trillion, half the EUR2 trillion the markets have been looking for. This agreement is only in words though and no official number or method for achieving it has been announced. The disagreements to derive over exactly how these funds will be raised and also the size of the haircut that banks and institutions will have to take on any Greek bonds they own. The IMF was said to favour a 70% cut while the owners of the bonds are struggling to get above 40%.

Further chaos added came from Italy where politicians came to blows as they discussed austerity cuts for the country. Rumours that Prime Minster Silvio Berlusconi will resign by the end of the year added fuel to the fire and the worries that Italy could be heading the way of Greece has grown severely over the last few weeks. French President Nicolas Sarkozy and German Chancellor Angela Merkel have been meeting with banks in order to thrash out details of haircuts and asking the banks to raise funds. France’s 4 largest banks are expected to raise EUR8.8bn with 13 German banks bring EUR5.2bn. Also, Spain’s 5 largest banks will raise EUR26bn leaving 5 Italian lenders needing to produce EUR14.7bn. This plus other banks across the Eurozone will raise a total of EUR106bn, with Britain’s lenders not raising anything to the total. This capital will be used as reserves to cover the losses from any write-downs on sovereign debt held with each institution.

Until these agreements are signed, sealed and delivered with the fine print read through, we are no closer to being out of the woods to last week.

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