It is an extraordinary measure for extraordinary times.
EU finance ministers have taken unprecedented action to prevent Greece’s debt crisis from causing turmoil in other euro zone countries.
Called the European Stabilisation Mechanism, the loan package, worth 500 billion euros, is aimed at supporting single currency nations if they need it.
The European Commission is putting up 60 billion euros. The rest, 440 billion euros, is being provided by the 16 euro zone states. With IMF support of around 250 billion euros, a whopping 750 billion could be available.
It is hoped the package will stabilise the eurozone and reassure the markets about the single currency.
So how will it work?
Destined for euro zone states in difficulty, the 60 billion euros of European Commission funding will be lent at an interest rate of five per cent. It is a credit facility similar to the 50 billion euros already available to EU members that don’t use the euro.
The euro zone’s 440 billion euros of loan guarantees are available for three years. Money would be raised on the financial markets to buy the debt of fragile euro zone states. Strict conditions, based on terms similar to those of the IMF, must be met to activate the programme.
Europe wants to send a strong signal.
“All in all, the fiscal efforts of EU member states, the financial assistance by the Commission and by the member states and the actions taken today by the ECB, prove we shall defend the euro, whatever it takes,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs.
The European Central Bank has indeed acted, as Greek woes continue to put financial market nerves on edge. To try to contain Greece’s debt crisis, the ECB says it will buy euro zone government and private debt.