From Bloomberg (bold emphasis mine)
European leaders persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros ($1.4 trillion), responding to global pressure to step up the fight against the financial crisis.
Ten hours of brinkmanship at the second crisis summit in four days delivered a plan that the euro area’s stewards said points the way out of the debt quagmire, even if key details are lacking. Last-ditch talks with bank representatives led to the debt-relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc.
“The world’s attention was on these talks,” German Chancellor Angela Merkel told reporters in Brussels at about 4:15 a.m. today. “We Europeans showed tonight that we reached the right conclusions.”
Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.
So the money destruction from recapitalization of European banks will be offset by the ECB’s bond purchases.
In addition, the deal transforms the EFSF into an insurance fund. As I earlier noted
In the Eurozone, a proposal being floated to ring fence the region’s banking system will be through the conversion of the EFSF into an insurance like credit mechanism, where the EFSF will bear the first 20% of losses on sovereign debts, but allows the banks to lever up its firepower fivefold to € 2 trillion
Yet the lack of real resources, insufficient capital by the ECB, highly concentrated and the high default correlation of underlying investments could be possible factors that could undermine such grandiose plans. Besides, such plans appear to have been tailor fitted to reduce credit rating risks of France and Germany aside from allowing the ECB to monetize on these debts.
The Eurozone’s rescue will rely heavily on the ECB’s QE program.
The rest of the world will also participate in the Euro bailout via the IMF which should not only dampen global economic performance overtime, but would also reduce available resources when the next crisis arises.
And China is also being asked to contribute more.
From another Bloomberg article,
French President Nicolas Sarkozy plans to call Chinese leader Hu Jintao tomorrow to discuss China contributing to a fund European leaders may set up to bolster their debt-crisis fight, said a person familiar with the matter.
The investment vehicle was one of the options being considered by European leaders at a summit tonight to expand the reach of its 440 billion-euro ($612 billion) European Financial Stability Facility.
Sarkozy’s plea to his Chinese counterpart would come the day before a planned visit to Beijing by Klaus Regling, chief executive officer of the EFSF, to court investors.
Should China give in to the request to support the Euro, this means a weaker US dollar.
Nevertheless, current events in the Eurozone reveals how privileged the US and Euro banking class have been, who are supported by their domestic and regional political patrons, and indirectly the US through the US Federal Reserve whose swap lines to the Eurozone which have tallied $1.85 billion, and the world through the IMF.
Yet all these centralized rescue plans seem to be anchored on hope which only buys time before next episode of this continuing crisis resurfaces.
For the meantime, the QE starved financial markets will likely get another boost. Thus the boom bust cycles.
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