Belmont Club

The Shortening Perimeter

The euro fiasco is about to escalate to a whole new level — Guardian
Market meltdown ahead? — MSN Money
Eurozone crisis makes early return as Italy and Spain suffer — Independent
That 30s feeling — Economist
Spain Is No Longer Master of Its Economic Destiny — WSJ
Greece in panic as it faces change of Homeric proportions — Guardian

Reuters says that European leaders are considering doubling or tripling the size of its bailout kitty to calm nervous markets and prevent a resurgent crisis from engulfing the Euro.

The Guardian sets the scene for the latest drama.  “Less than two weeks ago the leaders of the eurozone were looking forward to an August sunning themselves on the beach after concluding a deal that was supposed to resolve once and for all the debt crisis on the fringes of the single currency. Now the euphoria seems a distant memory, redolent of Neville Chamberlain’s “peace in our time” as the financial markets threaten two of the big beasts of monetary union – Italy and Spain.” Reuters describes the proposed defense. A final perimeter covered by everything Europe has left.

The spread of the Italian 10-year government bond yield over German Bunds jumped to a euro-era high of 3.85 percentage points on Tuesday, a level which, if sustained over the long term, could prevent Italy from borrowing in the markets at affordable rates.

To convince the markets that this will not happen, rich euro zone governments may have no choice but to override opposition among their taxpayers and pledge to contribute to a drastic expansion of the EFSF — perhaps doubling or tripling it. …

“A way of saying that is to have the fund so large that it can handle anything that comes its way. It would stop speculation in Spain and Italy,” said Fitzgerald, who sits on the board of the Irish central bank. …

The mathematics of the EFSF are not reassuring the markets, however. Rough calculations suggest the EFSF, which borrows its funds from the markets backed by guarantees from euro zone states, might conceivably cope with a bailout of Spain but there would be little room for error, while it would not have enough ammunition if Italy needed help….

It may have to stump up even more if the International Monetary Fund does not contribute one-third of the second Greek rescue; the IMF has provided about a third of past euro zone bailouts, but some emerging market stakeholders in the Fund are increasingly unhappy with pouring large sums into Europe.

But will it work? Things have gotten so bad that the OECD has urged the Greek government to end the custom of “civil service jobs for life” and open certain sectors to competition. With Europe’s unemployment figures at nearly catastrophic levels it is any hope in a storm.

Source: WSJ

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