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Europe Debt To Explode
By: Indranil Sen Gupta
January 26, 2012 04:47 PM
The objective of this article is to find out the hidden time bomb of Euro zone be which will derail the world economic growth in 2012. Just three weeks of the new year of 2012 and it seems that the Europe is slowly landing to resolve its debt problems. The world is thinking that words of IMF and ECB have resolved the debt problem of the European economy. In fact this has also lead Euro zone to sell its debt and find investors' appetite for its bonds. Even the recent downgrade by S&P of the nine states of Euro zone has been shrugged off by the Euro zone. All these are with stark contrast to last month of 2011 where majority of the Euro zone was struggling to meet their debt obligations as the cost of managing the debt climbed higher and even the governments of Athens and Rome went for a tailspin.
A quick glance at the debt executed by the Euro zone nations.
• Portuguese successfully sold euro 2.5 billion of its national debt.
• France easily sold euro9.5 billion, or about $12.2 billion, in bonds at interest rates lower than in previous auctions when the country enjoyed AAA ratings
• Spain raised euro6.6 billion ($8.5 billion), far more than its initial target of euro3.5 billion to euro4.5 billion.
Well it depicts that euro was able to find more stable sell of its bonds after the rating made by S&P. Euro zone found comfort in selling of its bonds since ECB has backed or rather has tempted to carry out the buys. In December ECB said that it will lend unlimited amounts of money to stabilize the Euro Zone.
Sudden Appetite of Bonds
In December, the ECB said it would lend banks unlimited amounts of money to stabilize them. Further it also added that it will also lower the interest rate on the loans to 1%, and even extended the maximum term of the loan period from 1 year to 3 years. Well this was enough to tempt the banks to raise funds and invest the same in the bonds and hence making an internal trade profit. Banks borrowed around euro489 billion ($632.6 billion) at 1% interest rates for a period of 3 years. European banks has used the funds to buy bonds at cheap funds from ECB and buying higher yield carrying sovereign bonds, resulting profit for the banks as an recapitalization mechanisms and that is also at the expense of taxpayers expenses.
That's, why the world is thinking the debt problem of Euro Zone is solved. But practically it cannot be solved even within a decade even.
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