Larger Euro Zone Bailout Fund

Now that the Greek bailout is in place EU officials are considering a larger Euro Zone bailout fund to deal with the likes of Italy and Spain. Published figures of €500 Billion indicate a fund four times the size of the recent Greek bailout cash infusion. According to press reports a final decision on creating a larger Euro Zone bailout fund have been put off for a month. Considering off again and on again nature of negotiations with Greece this sort of delay is no surprise. Forex traders have profited from long or short positions on the Euro for the last couple of years as Euro Zone news releases have indicated alternating good and bad news about the debt dilemma melodrama.

The current bailout fund, the European Financial Stability Facility, has been used to provide financial relief for Portugal, Ireland, and Greece. However, the fund is likely too small to help the larger economies of Spain and Italy. In addition to anteing up more money Euro Zone officials will likely change the temporary nature of the current bailout fund and name the new permanent fund the European Stability Mechanism. The issue of a larger Euro Zone bailout fund is a touchy one in countries such as Germany. Germany has the largest economy in the European Union and has anted up the most bailout money. German Chancellor Angela Merkel has led the way, along with the French, in gaining support for a rescue of Greece and pushing for changes that will guarantee the continued solidarity of the European Union. However, Merkel has to deal with increasing dissatisfaction at home. As the Greek debt melodrama has finally ended German voters are questioning just why they should be the ones to pay for what they see as profligate spending by one of their southern Euro Zone brothers.

The thought of having to now support an even larger fund aimed at rescuing Italy, Spain, and others has voters from Dusseldorf to Berlin asking, “why me.” The relatively small size of the current fund, however, provides investors with little confidence. As Italy, Spain, France, and others ask investors to buy bonds to cover their national debts the investors would feel more confident and would be willing to risk more money if they believed that the Euro Zone as a whole was ready to back up these economies in case of a debt default. Lacking that assurance, investors have demanded higher interest rates for the purchase of bonds from Italy and Spain, thus increasing the burden on these nations’ economies.

Although a larger Euro Zone bailout fund will likely alleviate the fears of some investors, Forex traders see a recession in the works in Europe. The need come up with more and more money coupled with nation by nation austerity measures is expected to drag the Euro Zone economy back into negative numbers for the next year or so. Unfortunately, this is exactly when the Euro Zone economy needs to be humming along in order to repay all of that debt. Forex traders are aware that a Euro Zone recession, larger Euro Zone bailout fund or no, will likely drag down production is Asia and affect North America. Then the question for Forex traders will be just which economy will be least injured by the continuing Euro Zone debt crisis and which currency will prosper compared to the rest.