Eurozone deal effective but costly

July 6, 2012
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The eurozone/FILE

, WASHINGTON, Jul 6 – A deal reached last month by eurozone leaders will reduce short-term risks for the regional economy but at a higher cost for wealthier members, ratings agency Moody’s estimated Thursday.

“The measures contained in last Friday’s statement by euro area leaders will reduce near-term risks of deposit runs or credit market shutdowns,” Moody’s said.

On June 29, EU leaders reached an agreement to enable two European rescue funds — the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) — to assist flailing economies.

Moody’s said EU leaders had indicated they were willing to take the necessary steps to avoid the “gradual unraveling of the euro area through additional defaults or exit.”

But the ratings agency warned that “closer fiscal integration carries a high cost,” as European countries “that are effectively supporting the others” will face pressure that could weaken their credit worthiness.

“Moreover, given the continued reactive nature of policy decisions, Moody’s believes that the normalization of sovereign debt markets could take a number of years,” the ratings agency said.

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