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Crisis in Europe (II)

Updated on January 24, 2012

Since I’m in the middle of an extent hub series trying to explain crisis in Europe I felt the need to dedicate this second hub for explaining some of the terms that will probably going to pop very often in my hubs, so each and everyone should know exactly their meaning.

So, here it is:

Eurozone

Part of the European Union, represented by 17 countries who adopted Euro as official currency. The Eurozone currently consists of Germany, France, Austria, Belgium, Cyprus, Estonia, Finland, Greece, Ireland, Italy, Luxembourg, Malta, Netherland, Portugal, Spain, Slovakia and Slovenia.

European Commission

Is the executive body of European Union, responsible for proposing legislation, implementing decisions and manages the day-to-day business of implementing EU policies and spending EU funds. The commission is formed by 27 members, each one representing a country from EU. Only this commission can make formal proposals for legislation in EU.

European Council

It’s an institution that comprises head of states from EU, along with the President of European Commision and President of European Council, design to draw the general political directions and priorities of EU. The meeting of this institution takes place at least twice every six months.

ECB

European Central Bank is the institution of European Union that administers the monetary policy of the states that are forming Eurozone. It’s main purpose is to maintain price stability within the Eurozone, meaning inflation control. Furthermore, it has the exclusive right to authorise the issuance of euro banknotes.

EFSF

European Financial Stability Facility is a fund created by the Eurozone member states in June 2010 with the purpose of maintain financial stability in Europe. In order to achieve this, is authorized to loan money to countries or banks form Eurozone that are in financial difficulties. His lending capacity was established at 440 billion euro, money that are drawn from financial markets with guarantee commitments from the members of Eurozone for a total of 780 billion euro.

EFSM

European Financial Stabilisation Mechanism is another fund created in may 2010 with the same purpose with EFSF. The difference is that this fund is much smaller then EFSF having a lending capacity of only 60 billion euro and is guaranteed by all the coutries that form European Union.

ESM

European Stabilisation Mechanism is a fund proposed to replace the ones that are functioning today, EFSF and EFSM, because those were intended to function only temporary, due to lack of a legal basis in EU treaties. After implementation, it supposedly will provide as much money as EFSF and EFSM combined, meaning 500 billion euro.

PIGS

That represents an acronym used to refer at countries from Eurozone that are in danger of default, because of the particular problems with their economies confront. The countries are Portugal, Italy, Greece and Spain. Later on the group included Ireland and the acronym modified in PIIGS.

Rating Agencies

Rating Agencies are key players in the financial markets, providing ratings for different types of bond issuers (private or governmental) that represent an assessment of bond issuers capacity of repaying their loan. At this point, the market is dominated by three firms, Standard&Poor, Moody’s and Fitch. Investments are made at lower or higher interests according to the rating of the bond issuer. Traditionally, investors take the lowest rank provided by the three agencies and act accordingly. Since all of them are American corporation, in an effort to countermeasure their decision highly European Officials declared that Europe take in consideration creation of a European rating agency.

CDS

A Credit Default Swap is an agreement between sellers and buyers, stating that in the event of a loan default the seller will compensate the buyer. In practice, this acts like a credit insurance although CDS are not subject to regulation governing traditional insurance. The buyer of CDS – usually someone who buys bonds and want to protect from default, make regular payments to the seller (insurance rates) and in the event of default, the seller pays the buyer the value of the bond in exchange for physical delivery of the bond. CDS is usually linked with the rating provided by the rating agencies, being larger when the rating is poor and represent a major factor in establishment of interest requested for bonds since usually the buyer increase the interest with the value of the payments made towards the seller for the CDS.

Eurobonds

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. One of the solutions proposed for resolving the crisis in Eurozone was the introduction of a joint “Eurobond” that would replace national issuance by individual members of the Eurozone. However, until now that was not materialized because that would require extensive changes in European Union treaties that could delay extensively the implementation.

Basel III

Basel III is an accord developed as a response to the deficiencies in financial regulation revealed by the financial crisis. Basel III strengthens bank capital requirement and introduces new requirements on bank liquidity and leverage. This should be implemented in a calendar that spreads over seven years up to 2019.

That’s about it, however the list remains open. I’m going to update it if I will stumble on other things that need to be explained or at readers request (as they are usually smarter then me!)

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