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Over the past month, a new phrase has entered the vocabulary of the European debt crisis: "Euro-TARP." The phrase refers to speculation that European finance ministers may recapitalize the region's banks to restore confidence in the institutions just like the U.S. did in the throes of the 2008 financial crisis through its $700 billion Troubled Asset Relief Program, which involved purchasing toxic mortgage-backed securities and later equity from banks. Despite continuing bad economic news, a report yesterday in the Financial Times that European bankers are merely "examining" such an action led to a late-day rally in markets. Such anticipation has created a lot of chatter in financial circles that Euro-TARP is now the best only hope for the global economy to escape problems sparked by debt-saddled nations like Greece and Italy.
Why the idea is gaining steam: Some of the biggest banks in France, Germany and Belgium hold tens of billions of euros in sovereign bonds from Greece and Italy, and their shares are falling as concern mounts about a Greek default. In this climate, a number of institutions--including, most recently, the Franco-Belgian lender Dexia--are having trouble financing their day-to-day operations and staying profitable. The European Union has already established a $589 billion fund--the European Financial Stability Facility (EFSF)--that can be used to recapitalize banks in eurozone countries (it can also be tapped for sovereign bailouts). But The Netherlands, Malta, and Slovakia have yet to approve of expanding the bailout fund. And the clock is ticking.