World leaders may have twisted Angela Merkel's arm into submission. The German chancellor, who's been vehemently opposed to further bailouts, reportedly agreed to a new pan-European bailout of Italy and Spain to the tune of €750 billion. The news comes out of the two-day G20 summit in Los Cabos, Mexico in which world leaders have placed pressure on Europe to act swiftly in dealing with its debt crisis.
While some observers are still skeptical that such a bailout actually exists (a spokeswoman for Merkel says "nothing has been decided yet"), The Guardian's Patrick Wintour and The Telegraph's Robert Winnett cite unnamed "G20 officials" saying an announcement will likely be made in the next few days. The details of the bailout, according to Winnett, will look like this:
Under the proposed deal, two European rescue funds – the 500 billion-euro European Stability Mechanism (ESM) and the 250-billion euro European Financial Stability Facility (EFSF) – will be able to buy bonds issued by beleaguered European countries ...
Under the new plan, the money in these funds will not be given directly to governments but will instead be used to buy up debts on the financial markets. The European Central Bank previously bought about 210 billion euros of bonds in this way but stopped last year.
The plan is designed to tamp down the skyrocketing borrowing cost of Spanish and Italian bonds by standing behind the debt of the eurozone's troubled members. Sources speaking with The Telegraph also said it's a step toward "establishing shared Eurobonds, where debt from across the single currency area is shared and effectively underwritten by Germany." What we'd like to know is how they got Merkel on board.
In the last few days, Merkel has repeatedly rejected the idea of jointly-issued eurobonds and has said Germany has been spread thin enough. As The New York Times' Nicholas Kulish and Paul Geitner reported last week, "Ms. Merkel said that she would resist any outside attempts to force Germany to consent to what she called 'simple' and 'counterproductive' quick fixes. Once again, she rejected jointly issued euro bonds or other forms of shared debt, which several leaders, including President François Hollande of France, have called for." It's always difficult to tell what markets are responding to but, for what it's worth, the Nasdaq index is up 34 points while the Dow Jones is up 95 points. Did Merkel finally cave?