Europe Finds The Bailout Dough: PIIGS Do Fly!
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
Sorry if you were planning to finally shop again in Europe — the European Union finally figured out that it was going to take a lot more than $140 billion to clean up its financial mess . . . it's more like a trillion dollars. Clearly when you get the French, the Germans and the Spanish, among others, to agree on a plan of this magnitude, we're in uncharted territory.
The crisis among the PIIGS (Portugal, Ireland, Italy, Greece and Spain) had escalated to a scary place last week, including deadly protests in Greece and violent moves in global markets. Over the weekend, European leaders were shaken into more dramatic (and necessary) action.
Here are the broad brushstrokes of the €750 billion (that's about $955 billion, based on current exchange rates) plan to stave off a continent-wide financial crisis:
• €440 billion in loans: The EU will specially create an off-balance-sheet entity called a Special Purpose Vehicle (SPV), which will borrow and lend money to troubled European countries. The borrowed money will be guaranteed by euro-zone countries (excluding the country asking for aid), which avoids the EU prohibition on one state's assuming the debt of another.
• €60 billion emergency fund: This fund comes under the EU treaty provision for natural disasters and other "exceptional occurrences." I guess we'd have to call the potential insolvency of a few European nations an exceptional occurrence.
• €250 billion from the International Monetary Fund
• Portugal and Spain agreed to reduce their budget deficits: Spain plans to cut its budget deficit to 9.3% of gross domestic product this year (from 11.2% in 2009), and to 6.5% in 2011. Portugal will cut its budget deficit to 7.3% of GDP this year (from 9.4% of GDP last year).
• The European Central Bank (ECB) announced that it would shore up the shaky European bond market.
• The Federal Reserve will get into the act by reopening swap lines: This is a lending program put in place during the financial crisis in which the Fed shipped dollars overseas through foreign central banks (like the ECB, Swiss National Bank and Bank of England). Those central banks, in turn, lent the dollars out to banks in their home countries in need of dollar funding. It was aimed at preventing further financial contagion. At the height of the crisis in December 2008, $583B of these swaps went overseas.
Bottom line: Investors are cheering with their wallets — futures are soaring across the globe, the shorts are getting squeezed, and the Euro is soaring. So maybe cancel that European shopping vacation!
