Eurozone leaders cautiously agree to bailout plan for Spain, Italy
Plan would reduce borrowing costs for beleaguered economies.
European leaders are announcing a €750 deal to bail out Spain and Italy from their crushing debt crises. The agreement came out of the G20 summit on Tuesday night. The money will come from two rescue funds, the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF).
Eurozone leaders have reached a tentative agreement to bailout Spain and Italy.
The agreement will help reduce borrowing rates and bring the cost of bonds down to sustainable levels.
The funds that will be used to bail out Spain and Italy were previously used to bail out Greece, Portugal and Ireland. The money for the funds has been provided by the various countries of the eurozone. Until now, the money was given to government in exchange for accepting austerity measures designed to reduce swelling government deficits.
This time, the money will be spent differently. Now the money will be used to buy debt on the financial markets.
One major factor in lending rates is risk. The higher the risk, the higher the rate on the bond. High-rate bonds contribute to debt by acting as a loan against future income; the bond must be repaid at the end of its term, and Spanish and Italian bonds carry very high rates because of their risk of default. It is hoped that by showing investors that the eurozone countries are willing to support one another, they can boost investor confidence and bring down rates by reducing the risk of default.
The announcement is important because it shows the eurozone is willing to muster more financial firepower to quell the crisis that has loomed for more than a year over the continent.
Meanwhile, investors have responded with cautious optimism. While an agreement has been reached, the details of the deal are still yet to be worked out. European leaders and financiers will have to meet again to finalize the plan. And while the idea may be unpalatable for some, the idea is also necessary to prevent the systematic collapse of the eurozone and a global recession.
© 2012, Distributed by NEWS CONSORTIUM.
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Pope Benedict XVI's Prayer Intentions for January 2013
General Intention: The Faith of Christians. That in this Year of Faith Christians may deepen their knowledge of the mystery of Christ and witness joyfully to the gift of faith in him.
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Keywords: Eurozone, bonds, Spain, Italy, bailout
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