Q&A: Can Europe's 750bn euro bailout package work?

Demonstration in Greece 23/4/10
Greece's debt problems have made investors nervous about lending money to other European countries with a lot of debt such as Portugal and Spain.
Map showing debt levels of eurozone countries
Many of the countries that use the euro have a great deal of debt. If lenders are nervous then the interest they have to pay on their borrowing goes up.
Graph showing falling cost of insuring European debt
The euro stability fund involves promising to repay lenders if countries do not pay back the money they have borrowed. It has made investors less nervous.
Graph comparing debt levels with the stability funds from the EU and IMF
The EU stability fund is worth 500bn euros ($635bn; £429bn) but that is not a lot compared with the amount of debt the countries involved have amassed.
Euro notes
The advantage of using loan guarantees is that if the plan works and no eurozone country defaults on its debts, then it will not cost anything.
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European governments and the International Monetary Fund (IMF) have stunned global stock markets with a 750bn-euro ($975bn; £650bn) package of standby funds designed to see off financial meltdown. How will it work?

euro The aid package is designed to stop the euro going up in flames
Who is involved?

The 27 countries of the European Union (EU) will contribute 500bn euros towards the financial safety net. They have been joined by the International Monetary Fund (IMF), which is providing another 250bn euros.

The vast bulk of Europe's contribution comes from the 16-nation eurozone bloc, which is promising 440bn in loan guarantees. The European Commission is providing 60bn euros immediately.

Crucially, the European Central Bank is to start buying bonds - government debt - something the European Central Bank said it would never do when it was established.

What's the purpose?

To stop the financial crisis in Greece from spreading and to calm financial markets, which dived last week because of concerns about the eurozone.

Governments hope that by promising to protect the eurozone they will promote confidence and encourage banks and other financial institution to lend to Spain and Portugal, where investors are demanding very high interest rates to loan money.

The magnitude and co-ordination of the package is also designed to signal to financial speculators that governments will do what it takes to protect the eurozone and its currency.

Many speculators who bet against the euro and the bond markets last week will have lost money as a result of the deal, which has pushed markets higher.

How exposed is the UK taxpayer?

The UK is not part of the eurozone, so its contribution to the package is via the European Commission fund and the IMF.

It is thought that if countries being loaned money defaulted the total UK liability could be about £15bn, though about £7bn of this money was pledged to a previous bail-out fund.

Alistair Darling, chancellor of the exchequer, said that the UK's exposure was "minimal" and that the UK was not underwriting the euro.

In an interview with the BBC he suggested that the UK was providing an additional £8bn in new money through its IMF and European Commission contribution.

How will the package work?

There is a lot of fine detail still to be worked out. The 60bn euros in emergency lending is available immediately and can be drawn on now by countries such as Spain and Portugal.

But a special purpose vehicle to dish out 440bn euros in bilateral loan guarantees will take longer to set up.

The ECB will intervene as and when it thinks necessary, buying bonds to help bolster confidence and kick-start markets.

However, the ECB will not be pumping fresh money into ailing economies. The ECB's purchase of bonds will be matched by the selling of other securities.

So, the package will not be used to fund the public spending cuts and tax rises needed in bloated economies such as Spain and Portugal.

But this does not tackle the fundamental economic problems

No, it does not. But the financial measures are designed to restore stability so that the longer term structural issues can be resolved.

The package has been likened to pouring water into a bucket with a hole. Eventually, you'll will have to fix the leak.

The weaker European countries will still have to re-pay their debts. And in the longer term that will only come from stronger economic growth and raising more tax revenues.

That said, the initial response from stock markets seems to suggest that ailing economies will get the financial breathing space needed to repair their buckets.

Share prices across Asia and Europe surged on news of the package, and the euro strengthened.

Will the eurozone emerge stronger?

Just a few weeks ago, the eurozone looked as if it was unravelling at the seams, with Greece destined to exit the single currency and the European Union in tatters.

Now eurozone leaders are hailing the package as a further step towards closer co-operation and integration. If countries are lending their neighbours vast amounts of money, they become further entwined.

In addition, the ECB is taking on a more powerful role in Europe, perhaps becoming something more akin to America's Federal Reserve.

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