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Tuesday 22.08.2017 | Name days: Rudīte, Everts

IMF preparing eurozone rescue plan

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU

Initial draft plan stipulating the rescue of the debt-stricken eurozone was agreed on during the International Monetary Fund’s (IMF) annual summit on Sunday, September 25, in Washington (U.S).

During the summit, the rescue plan’s approval time was coordinated, also identifying its extent, BBC reports in reference to unofficial sources in Washington.

The measure that could lead the eurozone out of the crisis is likely to be reviewed in Brussels, at the European Union (EU) Council’s meeting this October. It could be revised later in November during the «Big Twenty» summit, which is to take place in Cannes.

Moreover, according to the BBC’s information sources, the eurozone’s rescue plan also provides writing off 50% of the Greek sovereign debt, as well as significantly increasing the size of the European Financial Stability Facility. At the moment, it comprises 440 billion euro; however, it could further amount to two trillion euro. Instead of the usual mechanisms that should be approved by all national parliaments in the EU, this will be done at the expense of the European Central Bank’s (ECB) loans. These funds would be used to bail out countries no longer capable of easily getting loans from commercial lenders.

At the summit, many experts expressed confidence that two trillion euro is the minimum amount necessary to ensure effective operations of the Facility. Moreover, Italy’s need for assistance in the coming years should be taken into account.

BNN analysts conclude that the idea of boosting the European Financial Stability Facility through the European Central Bank will also affect the eurozone’s taxpayers who will have to indirectly shoulder debt risks. Besides, national parliaments may not like the fact that they are deprived of the voting power in deciding on such an important issue. It is already clear that implementation of the proposed measures will be more than difficult. While the consequences of possible failure will certainly reflect on the entire world.

Due to Greece’s massive budget deficit, Athens is unable to repay its debts, thereby relying on the IMF’s financial assistance. The Greek government continues to receive funds from the IMF’s rescue package, which was approved in May 2010. Whereas, if the country does not reduce the amount of expenditure, as required by the lenders, it may not get the next part of the loan. In this scenario, which is also highly possible, Greece will be unable to pay its obligations already in mid-October 2011.

With the aim to save Greece, the IMF offers writing off half of its debt. Such a possibility was already recognized by the Greek government, saying it would be the best possible solution.

Similarly, it was decided to recapitalize and strengthen the eurozone banks. Although this move will bring along enormous difficulties, there might not be any other option, given that banks in particular will have to deal with losses stemming from writing off 50% of funds lent to Greece. The question on how the aid will be provided to banks remains unanswered.

At the same time, the measures discussed in Washington are only at the initial stage and work on the eurozone’s rescue will continue.

BNN predicts that the situation could be further complicated by Italy’s economic hardships. The fact that Italy needs assistance is confirmed by the international rating agency Standard&Poor’s unexpected downgrade of Italy’s long-term credit rating by one notch – from A+ to A with a negative outlook. This might heighten financial markets’ concerns over the debt crisis spread in the eurozone.

The news agency BNN already reported that the EU leaders have been lately focusing on the eurozone’s debt crisis and the euro stability, although several economists and financial experts called these efforts insufficiently aggressive.

There have been assumptions that the euro could collapse. For example, SEB analysts claim that the EU has to decide in the nearest term either to entirely give up the euro or to strengthen the unity of institutions, which previously did not receive political support.

In their view, the main economic argument against the euro has been that the eurozone is not an optimal currency union, as there are too large differences among its member states.

Moreover, BNN analysts have observed that imbalance is further deepening, as confirmed by recent trends in the eurozone.

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