G8 Summit ended with pledge to support growth and Greece

The four day G8 Summit closed out at Camp Davis on Saturday with world leaders coming down in support of growth and saving Greece from the current financial crisis. At the same time, the leaders of the world put the onus on their European counterparts to deal with the financial turmoil before it starts hurting the rest of the world economy.

British PM David Cameron called for “decisive action” and “contingency plan” to combat and tackle the eurozone crisis. He also delicately prodded that the European Central Bank (ECB) should consider printing notes to revive demand in the single currency block.

US President Barack Obama, the host of the Camp Davis Summit, called upon the leaders of France, Germany and Italy to resolve the crisis through restoring public finances and encouraging stimulus. Keeping an eye on his re-election chances, President Obama proposed “stimulus” for job-creating infrastructures, and balancing it with “reforms” in order to address debts and deficits.

Lastly, in order to address the political and economic upheaval in Greece, the leaders of the G8 nations also reaffirmed their interest in keeping Greece within the euro zone. Though, they didn’t propose any solution to tackle the turmoil in Greece.

ECB infuses $639 billion fresh credit into European banking system

In an unprecedented move on Wednesday, the European Central Bank (ECB) has made available fresh credit worth approximately $639 billion (equivalent to €489.191 billion) for a period of three years at, unbelievably low, one percent interest. The figure has surpassed economists’ expectation by around $231 billion. By providing cheap loans, ECB is trying to address the issue of “long-term refinancing operation” of European banks (due on first quarter of 2012) and liquidity crisis in the market.

The $639 billion credit aid is considered as the biggest loan given by the European Central Bank in 13 years since the introduction of ‘Euro’ as the shared currency. It is believed that with the availability of cheap loans, banks in Europe might be able to avoid the impending recession. Approximately 500 European banks have applied for long-term loans on Wednesday. Among these are banks of France and Spanish banks.

It is hoped that the availability of cheap loans (at one percent interest) from ECB may spike up interest to buy government securities (bonds), which could bring down governments’ borrowing cost. Or, it may drive commercial banks to invest part of their fund in private sector, which could spur sustainable economic growth in Europe. But whichever options they may take, ECB hopes that, such an action would boost up profit for the banks, initiate growth and ease up the debt crisis in Europe.

Europe braces against the prospect of credit crunch deepening

Prospect of credit crunch deepens in Europe as markets witnessed massive selling of European government bonds by financial institutions around the globe. Such was the fear that not only new bond issues were shown the doors, but short term loans to reputed European banks were also cancelled.

Low investors’ confidence on European government bonds is believed to be linked with little information about the actual credit status of European banks and the way they are handled. Already Asian investors have started pulling out from European markets. Even Rabobank with AAA-credit rating, considered among the best European banks, had his loan cancelled by American institution, Vanguard.

On Friday, Mario Draghi, the newly appointed president of European Central Bank, has urged the countries affected by debit crisis to come to their own rescue instead of depending on the central bank.

It is feared that if selling pressure continues, higher borrowing costs, more cost cutting and slower growth would plague wider Europe. Euro zone banks are already in deep crisis trying to meet the rising borrowing costs. This is despite half a trillion cash inflow (in Euro currency) in debt from the European Central Bank. But this has little effect on the negative growth story in Europe so far. Already German bonds and Swedish bonds have started showing weakness. They are not strong as they used to be. Though they still are a safer bet than other European bonds – French, Spanish or Italian bonds.

Italy on jitters over the debt crisis

After Greece, it is Italy’s turn to be hit by the spiraling debt crisis. On Monday, Europe’s financial crisis worsened as Italian government bond almost touched 15-year high, aided by slow economic growth. Like Greek Prime Minister George Papandreou, pressure mounted on Italian Prime Minister, Silvio Berlusconi, to resign and allow a new government to exercise reforms to reduce debt. But unlike Papandreou, the Italian Prime Minister refused to step down from his chair.

Unlike Greece, Portugal and Ireland, Italy needs a huge rescue package. The Italian debt amounts to 1.9 trillion Euros. It is feared that arranging for such a massive bail-out package could bring down the European Union, if not the global economy.

Monday saw the 10-year government bond of Italy touch 6.6 percent, the highest since Euro was introduced in 1997. As interest rate rises, government has to pay out more from its budget to investors who own these government bonds, thereby getting into debt.
The austerity measures promised by Italy to the European Central Bank was supposed to be passed before November 15th, current year. But that is caught in the deadlock because of conflicting interest within the government.

In an effort to save Italy from going under further debt crisis, European Central Bank has been buying government bonds to check its borrowing costs. But to tackle debt crisis, the Italian government must be prepared to take tough stand.