Debt crisis plan wins G20 support

EUROPE'S revamped strategy to beat its two-year sovereign debt crisis won the backing of global finance chiefs, who urged the region's leaders to deal "decisively" with the turmoil when they meet for emergency talks next weekend.

By InvestSMART · 17 Oct 2011

By InvestSMART ·
17 Oct 2011

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European officials outlined the initiatives they are considering at the meeting in Paris of finance ministers and central bankers from the Group of 20 economies.

With the continent's fiscal woes rattling financial markets and threatening the world economy, governments were urged to complete the plan at their summit in Brussels and to tame the threat of contagion by maximising the firepower of their ?440 billion ($590 billion) bailout fund.

"The plan has the right elements," the US Treasury Secretary, Timothy Geithner, told reporters in Paris. The Bank of Canada governor, Mark Carney, said that "some of what is being considered, if fully implemented, would be sufficient in our opinion".

Policymakers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while remaining split over whether the lender needs a fillip of cash.

"The IMF has a substantial arsenal of financial resources, and we would support further use of those existing resources to supplement a comprehensive, well-designed European strategy alongside a more substantial commitment of European resources," Mr Geithner said.

He said that the US would back more money for the fund only if a "compelling case" was made, as its $US390 billion ($377 billion) war chest is "very, very substantial".

Europe's strategy, which has still to be made public, includes writing down Greek bonds by as much as 50 per cent, establishing a backstop for banks and multiplying the strength of the newly-enhanced European Financial Stability Facility, sources have said.

Optimism the crisis may soon be tamed spurred stocks higher last week and pushed the euro to its biggest gain against the US dollar in more than two years.

Almost two years to the day since Greece set the crisis in motion by announcing it had underestimated its budget deficit, Europe's latest strategy hinges on putting it on a viable path. Austerity measures have plunged Greece deeper into recession and provoked civil unrest that threatens political stability.

Failure to curb the pain has led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt-strapped nations such as Italy. Investors are concerned that if the crisis is allowed to fester, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers.

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Frequently Asked Questions about this Article…

What is the European debt-crisis plan that won G20 support?

G20 finance chiefs backed a revamped European debt-crisis plan aimed at resolving a two-year sovereign debt emergency. The strategy — urged to be completed at the upcoming Brussels summit — includes measures such as writing down Greek bonds by as much as 50%, establishing a bank backstop and strengthening the newly enhanced European Financial Stability Facility (EFSF).

How will the €440 billion European bailout fund (EFSF) be used to limit contagion?

Officials urged governments to maximise the firepower of the €440 billion bailout fund by multiplying the strength of the newly-enhanced EFSF and using it alongside bank backstops. The goal is to tame contagion across markets by making the EFSF a stronger backstop for sovereigns and banks.

What does a 50% write-down of Greek bonds mean for investors and Greece’s debt problem?

A write-down of Greek bonds by as much as 50% means reducing the face value of those bonds to lower Greece’s overall debt burden. The measure is part of Europe’s strategy to put Greece on a more viable path, although the article notes this has been paired with austerity measures that have deepened Greece’s recession and raised political risk.

What role could the International Monetary Fund (IMF) play in the European debt solution?

Policymakers signalled the IMF could supplement a comprehensive European strategy by using its existing financial resources. U.S. Treasury Secretary Timothy Geithner said the IMF has a substantial arsenal and that further use of those resources could be supported, though additional national contributions (including from the U.S.) would depend on a compelling case.

How did markets respond after news of the European debt plan and G20 backing?

Optimism about the plan pushed stocks higher and drove the euro to its biggest gain against the U.S. dollar in more than two years, reflecting investor hope that decisive action could calm the crisis.

Which countries have already needed bailouts, and which larger nations are investors worried about?

Portugal and Ireland have already required bailouts. The article says markets have begun targeting larger debt‑strapped nations such as Italy, raising wider investor concerns about contagion.

How have austerity measures affected Greece and investor confidence in Europe?

According to the article, austerity measures have plunged Greece deeper into recession and provoked civil unrest that threatens political stability. That failure to ease the economic pain has contributed to wider investor worries that the crisis could spread and harm the global economy.

What should everyday investors watch for in the coming European emergency talks and the Brussels summit?

Investors should watch whether European leaders finalise the plan at the Brussels summit and look for specific steps mentioned in the article: bond writedowns (for example, Greek bonds), bank backstops, and measures to strengthen the EFSF. Announcements about IMF support or additional funding would also be market‑moving developments.