By: Dr. Mike Campbell
The EU and IMF have underwritten bailouts to Greece and Ireland which total €195 billion over three years. Effectively, both nations will have access to guaranteed funds at an interest rate which is significantly lower than the market rate being demanded of them, but above the rates that some EU members themselves are charged in the bond market.
The bailouts are hardly an act of charity; nor are they as altruistic as many members of the general public perceive. Eurozone members, in particular, have a vested interest in the survival and welfare of the Euro.
The spectre of sovereign debt continues to haunt the Eurozone (but it could just as well be the USA or Japan). Speculation currently focuses on Portugal as the next candidate for a bailout – an eventuality strenuously denied in Lisbon, with Spain waiting in the wings. Doubts have been raised that the funds currently available will be sufficient to help both nations if called upon (of course, both Spain and Portugal insist that they can manage their debts in the market).
Against this backdrop, the European Financial Stability Fund (EFSF) is to issue a bond programme which should eventually attract €440 billion – of course, it has to be paid back to investors when the bonds falls due.
The Japanese have indicated that they will support the issue, investing a reported €930 million in the initial issue, which is reputed to be worth €3 to 5 billion, later this month. The Japanese have indicated that they will purchase the bonds with their existing Euro holdings, so the move will not (in itself) drive the Euro higher on Forex markets.
Presumably, the EFSF move is designed to ensure that funds would be available to support any Eurozone member that found themselves in difficulties raising funds through traditional means. Hopefully, this move may serve to quell the on-going sovereign debt jitters that have plagued the Euro since the Greek debacle in the spring of 2010.