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Euro zone vows to fend off 'wolf pack' traders at all costs

Currency and bond traders waging war against euro-zone countries may meet a new foe Monday morning in the form of fresh rescue mechanisms for the weakest countries that use the currency.

In Brussels this afternoon, European Union finance ministers said they will do whatever it takes to stabilize the euro and prevent traders from pounding sovereign bonds into oblivion, as they did with Greek bonds.

Details of the new efforts were not immediately available, though France and Germany, the euro zone's strongest members, said they had agreed on measures to prevent the debt crisis from spiralling out of control. "We are going to defend the euro," Spanish Finance Minister Elena Salgado said. "We have to give more stability to our currency.… We will do whatever is necessary."

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The new efforts come after the €110-billion Greek firewall erected by the EU failed to prevent the spread of the sovereign-debt crisis to Portugal and Spain

Economists said deployment speed should be the focus of any of the new efforts. The €110-billion Greek bailout fund was held up for months while politicians debated the package and parliamentary approvals trickled in. The German parliament approved its contribution to the bailout effort on Friday, long after the yields on some Greek, Portuguese and Spanish bonds jumped to record levels.

"We are seeing wolf-pack behaviour in the markets, and if we don't stop these packs, they will tear the weaker countries apart," Anders Borg, Sweden's Finance Minister, said on Sunday in Brussels, before the ministers' meeting.

Early press reports said the part of the new rescue mechanism consists of a €60-billion increase to an existing €50-billion balance-of-payments facility that the EU used two years ago to help Hungary, Romania and Latvia, three non-euro-zone countries. The facility would be extended to cover all the euro zone - the 16 EU countries that share the euro - and could rise to €110-billion.

The second is a "stabilization" facility that would see bilateral loan guarantees between euro-zone countries.

Germany's longer-term support for any stabilization efforts took a blow Sunday, as exit polls suggested that Chancellor Angela Merkel's coalition government of Christian Democrats and Free Democrats had lost the regional election in North Rhine-Westphalia. Germany's sponsorship of the Greek bailout package, unpopular among Germans, was one of the key election issues.

A defeat for the two coalition parties could send Ms. Merkel's economic proposals, including tax cuts and Germany's support for Greece, into turmoil. Germany's portion of Greece's emergency loans is €22.5-billion.

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The EU's new efforts to prevent the debt crisis from deepening is, in effect, admission that the Greek bailout package was too little, too late. While the package will allow Greece to roll over its bonds and fund its deficit away from the public markets for about two years, it did not convince investors, economists and strategists that it was sufficient to prevent an eventual default or debt restructuring.

In response to the skepticism, Portuguese and Greek bonds rose so high the countries were virtually unable to fund themselves. On Friday, the yield on two-year Portuguese notes reached 8.78 per cent. That's about eight percentage points above the yields on comparable German bonds, the debt considered the euro zone's safest.

Portugal and Spain's woes have been pushing down the euro at alarming speed. On Friday, the currency hit a 14-month low of US$1.250 after sliding about 5 per cent over the week.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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