Eurozone crisis - Bondholders must accept some losses

THE great uncertainty about how Greece can continue to function and pay its debts will test the European Union’s capacity to support its member states, its commitment to solidarity and whether the EU is more committed to the needs of the citizens of Europe or protecting Europe’s banking system.

Yesterday’s plea from French President Nicolas Sarkozy to other EU leaders to quickly reach an agreement on how the crisis might be contained underlined the urgency of the situation. The indecision and disagreement blocking a unified approach sent fresh shock waves through currencies, money markets, equities and derivatives yesterday. The euro fell more than 2% in the past two days and reached its lowest ever point against the Swiss franc. The cost of protecting corporate bonds soared to its highest level since January, with credit-default swaps anticipating about a 74% chance that Greece would not repay its loans.

In an effort to create some degree of stability the IMF has agreed to immediately lend funds to Greece to try to prevent a default. This support came against a background of political chaos and street violence as protests against new austerity measures intensify.