Markets boosted by eurozone deal

Markets boosted by eurozone deal

22 July 2011 / by Paul Dicken

Despite warnings that it may not be enough in the long term, a new deal to prop up Greece and prevent problems spreading to other countries has boosted markets.

A number of measures were agreed by eurozone leaders at a summit on 21 July. These include changes to the European financial stability facility, making it more akin to a European monetary fund, and a debt rollover agreement with private sector holders of Greek debt.

The decision to include private sector bond holders in the package is being seen as a selective Greek default, the first since the creation of the euro area, but the assurances from the euro area countries – those that have the euro currency – that Greece was a one-off appear to have gained some traction.

A statement from the heads of state and governments in the eurozone stated: “As far as our general approach to private sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.”

The private sector involvement is a voluntary agreement and will help cover a financing gap that Greece is facing.

Market reactions

On Thursday 21 July the broad response from the markets was positive. The euro has picked up after falling in value against the dollar in trading earlier this week. The yields on bonds in some eurozone countries also stabilised, notably in Spain and Italy where the costs of borrowing for those governments had spiked.

In early trading on 22 July 2011, the FTSE 100 Index was up, suggesting a positive early response to the latest attempt to keep the eurozone intact and support those countries struggling with high debt burdens.

Financial groups and banks were in positive territory, with Barclays, Royal Bank of Scotland and Aviva all up following the news from Europe.

The statement from the eurozone leaders issued on 21 July reiterated a commitment to financial stability in the euro area, saying the ‘challenges at hand’ had shown the need for ‘more far reaching measures’.

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