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Economy

Eurocrisis buzzwords - Part 2

As the euro crisis becomes more threatening, understanding the buzzwords is becoming more difficult. Part 2 of our guide explains some more of the terms politicians and economists are using.

Eurobonds

Up until now, each country has issued its own government bonds. Those with high national deficits have to pay high interest rates. Those the market believes have their budgets under control can obtain money at a lower rate of interest. Eurobonds would be common government bonds, for which all the eurozone countries would be co-guarantors. These euro-government bonds would balance out their individual differences.

German Chancellor Angela Merkel

German Chancellor Angela Merkel is critical of Eurobonds

Interest rates would lie somewhere between Germany's relatively low rates and Greece's very high ones. In one fell swoop, crisis-stricken countries on the brink of bankruptcy would be able to refinance themselves at a relatively good rate. However, countries that have been paying low interest rates would face higher payments. Countries like Germany also fear that introducing Eurobonds could remove the motivation for ailing countries to implement reforms.

European Redemption Pact

The ERP has a similar structure to the proposed Eurobonds, but the amount of money and the length of time for which it is available are limited. All of the participating countries are supposed to be able swap their debts within the fund, but this only applies to those debts worth more than 60 percent of the country's economic output. Each government can determine at the outset how much debt it will swap. The fund would then issue bonds and pay the revenue from the interest back to the countries. Because the countries have shared accountability, countries prone to crisis would pay a lower interest rate - just as in the case of Eurobonds - whereas countries that already pay low interest rates would pay more, putting them at a disadvantage.

Fiscal pact

A hand wrapped in an EU flag and clutching a fistful of banknotes

The EU wants to enforce stricter rules on spending money

Its motto is "Learn from experience." Europe wants to use the fiscal pact to commit itself to stricter rules for spending money. It includes a debt limit which every country has to enshrine in its constitution. If a country were to exceed the limit with new debts, it would have to pay a fine. The fiscal pact will come into effect as soon as twelve nations of the 17-member eurozone have ratified it. The German parliament has already approved the pact, but this is still under review by the Constitutional Court.

Base rate

The European Central Bank can use its base rate, or prime rate, to determine the rate of interest at which banks can borrow money. Ideally, the banks should pass on the high or low interest to their customers. A lower base rate is intended to boost the economy in times of financial crisis because it artificially increases the amount of money available. This is precisely what the ECB is trying to do. Since the start of the eurozone debt crisis it has been continually lowering its base rate, which is now down to 0.75 percent.

Credit rating agencies

From a European perspective, the credit rating agencies are often the bad guys. They're the ones who appraise a country's creditworthiness, a verdict which has psychological consequences.

American conference delegates from the Fitch credit rating agency look at a list of European countries' credit ratings in January 2012.

The verdicts of the credit rating agencies influence a country's ability to borrow

The worse a country's credit rating is, the more interest investors demand when lending countries money. And that means government bonds become more expensive. The agencies that set the tone include Standard & Poor's, Fitch, and Moody's. Standard & Poor's has been in operation since the 19th century, but the euro crisis has given it more power than it ever had in the past.

Troika

The eurozone crisis is too big for one entity to handle alone, which is why three have been yoked together in the so-called "Troika": the European Commission, the European Central Bank, and the International Monetary Fund. The institutions work together to agree a course of action and monitor the countries that have received bailouts.

See Part 1 for bonds, banking union, the ESM, and more.

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