(MENAFN- AFP) The eurozone has safeguards in place to avoid the contagion which could result from the Greek debt crisis and a possible "Grexit", or exit from the eurozone -- even if the exact consequences are still unpredictable.
Here is an outline of the situation:
The ESM, Europe's bailout vehicle
The European Stability Mechanism (ESM), established in 2012, is a means to manage eurozone financial crises. It has access to 80 billion euros paid in by member states -- the highest level of capital among global financial institutions. That gives it a lending capacity of 500 billion euros. Its role is to maintain financial stability in the eurozone and it can raise money on capital markets to lend to struggling countries at favourable rates. It can also ease pressure on a state under fire from the markets by purchasing debt. The ESM is a pillar of wider efforts made in recent years to unify economic policy in the eurozone.
The ECB, the eurozone's central bank
In 2012, European Central Bank President Mario Draghi famously pledged to do "whatever it takes" to save the euro. The central bank was set up in 1999 and sets interest rates for the eurozone. Instruments at its disposal include OMTs (outright monetary transactions) -- basically buying bonds of eurozone member states on secondary markets. This facility was set up in 2012 during the European debt crisis but has not yet been used. The ECB can also count on quantitative easing (QE) -- often described as printing money -- which has been in use since March to push up eurozone inflation, purchasing 60 billion euros of debt each month.
Banking union
Imposed slowly and painfully due to it eroding the financial sovereignty of member states, banking union is supposed to prevent a banking crisis from spreading to the rest of the economy. It has two pillars. One is the Single Supervisory Mechanism overseen by the ECB which keeps an eye out for signs of bank weakness in order to prevent it worsening. The other is the Single Resolution Mechanism, which is designed to bail out troubled institutions or to manage their failure. Its resources will reach 55 billion euros by 2025. Analysts say that European banks in general are much less exposed to Greece than in the past. Banks have also been forced to boost their capital reserves and liquidity, making them more resistant to shocks.
Once-vulnerable countries stronger
Ireland and Portugal received bailouts from the so-called "troika" of lenders the EU, ECB and IMF (International Monetary Fund) in 2010 and 2011, respectively. Their economies underwent structural reform and tough budget measures. Like Spain, whose banking sector also received assistance, they exited these measures between the end of 2013 and early 2014. Cyprus, which also benefited from a bailout in 2013, announced earlier this year that it would exit the programme early after emerging from financial meltdown sooner than expected.
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