G20 Summit: Perils of a Half-Baked Rescue for Spain And Italy!
- G20 summit: perils of a half-baked rescue for Spain and Italy!
By Ambrose Evans-Pritchard, http://www.telegraph.co.uk/
Germany and France are doubling up on a high-risk gamble. The tentative deal at the G20 summit to mobilise the EU’s rescue machinery to douse the raging fire in Spain and Italy comes in the nick of time, but is fraught with fresh dangers.
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Chancellor Angela Merkel and President Francois Hollande have to do something. The market reaction to Spain’s €100bn EMU rescue for its banks has been calamitous. Monday’s explosive rise in Spanish two-year bond yields was a warning that Spain’s crisis would spiral out of control within days, taking Italy with it.
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Yet the deal explored over ceviche and mango at Los Cabos in Mexico remains murky. Any plan will backfire horribly unless conducted in the right way, and with overwhelming force.
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From what we know, the eurozone’s leaders aim to deploy the European Stability Mechanism (ESM) to cap borrowing costs for Spain and Italy by purchasing sovereign bonds on the open market.
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Unfortunately, the ESM fund does not yet exist. It has not been ratified by Germany and Italy. When it does come into being, it won’t have much money. It has a theoretical limit of €500bn — a nice wish — but its paid up capital will start at just €22bn.
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Britain’s George Osborne cautioned against exuberance. “One thing we have learnt is: don’t expect a single summit to solve the eurozone’s problems, otherwise you are going to be disappointed. The eurozone is inching towards solutions.”
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