Last night Brussels released a 15 page document detailing an emergency three pronged plan to deal with the crisis.
The three areas to be dealt with are:
- Greek Debt
- Bailout Fund
- Recapitalisation of the banks
Bond holders of Greek debt i.e. the banks who hold Greek debt have agreed to accept a 50% cut on their returns. The benefit for Greece is that its debt to GDP ratio should decrease to 120% by 2020 rather than rise to 180% if there wasn’t a 50% “haircut”.
The European Financial Stability Fund (EFSF) has been boosted to one trillion euros (yes that’s a 1 with 12 zeros after it! 1,000,000,000,000). When the fund was established it had 440 billion euros at its disposal so this is a considerable increase. The EFSF’s mandate is to “safeguard financial stability in Europe by providing financial assistance to euro area Member states”. While the fund itself only has 250 billion euros in it this sum can be leveraged 4-5 times and what this means in plain english is that 4-5 times the sum of 250 billion can be borrowed to boost the fund’s firepower.
The banks will have to increase their capital by 30 June 2012. Where necessary national governments should help the banks and if this is not possible then the recapitalisation could be funded by a loan from the EFSF in the case of Eurozone countries.
Certainly the stock markets seem happier this morning with the FTSE trading up 2.06% by 9.30am and STOXX up 3.54%.
By David Gibson