Eurozone – The First Step into the Unknown

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With the approval of the EFSF funds by the IMF, there is a wave of cautious optimism in the financial markets about the prospects of the Greek economy moving forward.

Eurozone crisis
Photo: EuroCrisisExplained/Flickr

With smiles on their faces and shakes of the hand, leaders of the Eurozone plunged into unknown Greek bailout territory.

The lenders led by the IMF, have agreed to lend 5.7 billion euros to shore up Greece’s finances, with the IMF itself making up 1.7 billion euros of the total sum. The bailout package designed by the IMF was given the green signal by Germany’s parliamentary budget committee cleared 2.5 billion euros from the European Financial Stability Facility (EFSF).

The fund was agreed upon by all lenders in the last year, and tranches were created allowing different lenders to contribute their own share into the fund. Another 1.5 billion euros is expected to be paid by European central banks, using Greek secondary bonds and related profits from these transactions. These are healthy steps as it is returning some of the liquidity that Greece’s sovereign bonds had lost.

These measures will allow for enhanced financial stability and structure to return to Greece.

Critics like the Italian Prime Minister Enrico Letta say that the financial plan took too long, and if it was efficient, it would have caused less of a financial disaster and caused fewer job losses. Letta went on to say that the Greek bailout package had been planned in the wrong manner with bad policies, timing, and instruments, which meant that the sufferer at the end was the Euro, instead of Greece. This not only hurt all the other Eurozone countries but was also a drag on the world economy in total.

The funds to be be injected into the Greek economy will have a two pronged effects on the Greek market.

  • First, it will supplement some of the expenditures that Greece wants to carry out to stimulate economic growth in the long run.
  • Second, for the short run, more liquidity will allow Greece to buy back some of its debt, which does seem somewhat redundant, but it does secure future lending capacity which can be exercised and allows Greece to regain some credibility in the sovereign bond market.

The Greek Prime Minister Antonis Samaras did not want to comment on the package and execution of it, but did say that the plan was the best they could come up with — and now it was time to act on the plan and follow it. He urged the need to get the economy back on track so that Greece does not become dependent on the IMF loan program. He emphasized a growth oriented approach in order to build a surplus into the economy.

When these plans were being made last year, and lines being drawn in the sand, some felt that the plan did not go far enough — while others thought that it should be given time to run its course. Now that a plan has finally been devised and agreed upon, there is a feeling that the best thing now, is to watch how the plan works.

One positive note seems to be some optimism in the markets, likely on account of the substantial steps that are being taken to address the Eurozone/Greek issue.

© Zain Naeem

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