Eurozone leaders cautiously agree to bailout plan for Spain, Italy

European leaders are announcing a €750 deal to bail out Spain and Italy from their crushing debt crises. The agreement came out of the G20 summit on Tuesday night. The money will come from two rescue funds, the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF).

LOS CABOS/CABO SAN LUCAS, MEXICO (Catholic Online) - Meeting in the opulent resorts of Cabo San Lucas, Mexico, the eurozone leaders have finally agreed to take strong action to avert the possibility of economic collapse in Spain and Italy. 

The agreement will help reduce borrowing rates and bring the cost of bonds down to sustainable levels. 

The funds that will be used to bail out Spain and Italy were previously used to bail out Greece, Portugal and Ireland. The money for the funds has been provided by the various countries of the eurozone. Until now, the money was given to government in exchange for accepting austerity measures designed to reduce swelling government deficits. 

This time, the money will be spent differently. Now the money will be used to buy debt on the financial markets. 

One major factor in lending rates is risk. The higher the risk, the higher the rate on the bond. High-rate bonds contribute to debt by acting as a loan against future income; the bond must be repaid at the end of its term, and Spanish and Italian bonds carry very high rates because of their risk of default. It is hoped that by showing investors that the eurozone countries are willing to support one another, they can boost investor confidence and bring down rates by reducing the risk of default.

The announcement is important because it shows the eurozone is willing to muster more financial firepower to quell the crisis that has loomed for more than a year over the continent. 

Meanwhile, investors have responded with cautious optimism. While an agreement has been reached, the details of the deal are still yet to be worked out. European leaders and financiers will have to meet again to finalize the plan. And while the idea may be unpalatable for some, the idea is also necessary  to prevent the systematic collapse of the eurozone and a global recession.

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