The price of pragmatism

Economist
May 11, 2010

The euro zone’s rescue scheme is big and bold but leaves the ECB looking compromised.

For weeks there have been calls for the euro zone's policymakers to get ahead of the sovereign-debt crisis, which started in Greece and was in danger of engulfing other countries with big budget deficits and poor growth prospects. In the early hours of May 10th, such a plan finally emerged. After a lengthy summit in Brussels, European finance ministers agreed on a “stabilisation fund” worth up to €500 billion ($640 billion) over three years. That sum would be supplemented by a further €220 billion or more from the IMF. In addition, the European Central Bank (ECB) said it would purchase government bonds to restore calm to “dysfunctional” markets.

The market response was euphoric. Germany’s stockmarket had risen by more than 5% when it closed on May 10th. The CAC 40, the main index in France, was up by almost 10%: big French banks are heavily exposed to Greece, so they stand to benefit from a cast-iron rescue package. The yield on ten-year Greek government bonds plunged from more than 12% to less than 8%. The yields on comparable bonds for Portugal, Spain, Italy and Ireland also fell sharply. The euro rose a bit against the dollar.

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