Tags: Eurozone | ESM | Credit | Suisse

Credit Suisse: Eurozone Fund Might Fall Short

By    |   Monday, 27 Aug 2012 11:42 AM

A fund designed to save the eurozone will fall short if Spain and Italy need a full bailout, warns Credit Suisse, according to CNBC.

The European Stability Mechanism (ESM), seen as a vital tool to tackle the eurozone debt crisis, is scheduled to replace the European Financial Stability Facility later this year.

The problem is that the fund might not be large enough if Spain and Italy need a full bailout, a prospect that's become increasingly likely, CNBC reports. Germany, the fund's largest contributor, has become increasingly displeased about ongoing bailouts of other eurozone countries. And if Germany limits its contribution, the fund would be greatly weakened.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

“The capacity of the ESM is now of reduced importance,” Credit Suisse analysts wrote in a research note, according to CNBC.

The ESM has an official lending capacity of about 400 billion euros, but the limit is 408 billion euros ($510 billion) when current bailouts are counted, according to CNBC.

By buying bonds of troubled eurozone countries, the ESM can hold down bond yields and borrowing costs. Eurozone nations have sought help when their borrowing costs have surpassed 7 percent, a mark seen as a danger point.

Another possible roadblock is that the German Constitutional Court must approve it. The court is expected to issue a ruling on Sept. 12.

A key factor is if the European Central Bank (ECB) will also purchase sovereign bonds, but that's doubtful. Germany has opposed that idea and Bundesbank Chief Jens Weidmann has said bond purchases could become "addictive like a drug."

Despite opposition in Germany, the ECB should purchase government bonds to avoid a self-fulfilling fiscal crisis, argues economics professor Sebastian Dullien, writing in The Guardian.

If investors believe a country will repay its debt, they will demand low interest rates, making repaying the debt easier, Dullien argues. If investors are unsure if a country can repay its debt, they will demand higher rates, and those higher rates will make repaying the debt difficult.

The central bank, he says, could hold down those bond rates by explicitly or implicitly guaranteeing to buy bonds.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

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Monday, 27 Aug 2012 11:42 AM
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