Saving Greece and the euro zone with the ESFS

Inviato il 26 October 2011 da Forex Staff

In Greece, the parliament has given initial approval for a new round of restrictive measures necessary to avoid a default that could have a strong reverberation in the whole euro area. The Greek police clashed with protesters in black this week outside the parliament and workers also did the largest strike in recent years to protest the cuts required to help their country in return.

Slovenia, the last member of the euro zone to suffer a downgrade of the credit,  has weakened. Standard & Poor has cut its rating for long-and short-term sovereign debt. The Prime Minister of Finland Jyrki Katainen said that by tomorrow we should resolve the debt crisis in the euro area, although according to him at the summit will not reach this goal.

The EU Commissioner for Economic and Monetary Affairs, Olli Rehn, said he is trying to find a solution, even after Wednesday’s meeting between Merkel and Sarkozy. The hope for the euro area remains that leaders can agree to reduce the debt of Greece, strengthen bank capital and take advantage of the eurozone bailout fund to stem the spread to larger economies.

With regard to the fund, officials of the euro zone have said that an alternative model for the EFSF would be to allow follow a series of newly issued debt securities. Delivering the first 20 or 30 percent of the losses, the EFSF could last up to five times more, giving the market a pause for reflection.

However, analysts are convinced that a plan involving a guarantee of military losses would be a success at first, but become useless without an explicit commitment by the ECB to continue to buy the debt at risk. On paper, in fact, this solution has some merit because it is useful but in reality is full of complications that most likely will fail.