APPENDIX 3: GLOSSARY[127]
Bond A debt security. The bond states
when a loan must be repaid and what interest
the borrower (issuer) must pay to the holder.
They can be issued by companies, banks or governments
("sovereign bonds") to raise money. Banks and investors
buy and trade bonds.
Contagion A scenario where the financial
difficulties of one economy spread to other
economies.
Credit rating The assessment given to debts
and borrowers by a ratings agency according
to their safety from an investment standpoint.
Deleveraging A process whereby borrowers
reduce their debtloads.
EBA European Banking Authority.
ECB European Central Bank.
Economic A loose term that captures the
different arrangements governance for running the economic
and monetary union, and for coordinating
economic policies within the wider EU.
EFSF European Financial Stability Facility.
EFSM European Financial Stabilisation
Mechanism.
EMU Economic and Monetary Union.
Equity The value of a business or investment
after subtracting any debts owed by it.
ESM European Stability Mechanism.
EU European Union.
Eurobond A term increasingly used for the
idea of a common, jointly guaranteed bond of
the euro area governments.
Eurogroup A body composed of the finance
ministers of the Member States of the euro
area.
European Council A council of all the heads of
state or government of the European Union.
Fiscal policy Policies relating to government
taxation and spending decisions.
Fiscal union A generic term covering a range
of proposals for closer fiscal integration
amongst euro area countries. These might range from
a situation where a euro area institution co-ordinated individual
nations' fiscal policies, to full fiscal union where a
central authority would control fiscal policy for the entire euro
area.
GDP Gross Domestic Product.
G20 The group of industrialised countries
and developing countries who play a major
role in the world economy.
Haircut A haircut occurs when a lender has
to accept a reduction in the redemption value
of a bond because of the inability of the borrower
to pay it in full; for example, if only 90 cents is repaid
per euro, the haircut would be ten cents (10 per cent).
IMF International Monetary Fund.
Leveraging Using debt to supplement investment.
Liquidity The ability to convert an asset
into cash. A "liquidity crisis" is when
it becomes more difficult to obtain cash.
LTRO Long Term Refinancing Operation.
Macroeconomic A macroeconomic imbalance exists
where the trajectory of the imbalances economy is unsustainable
and risks causing problems of volatility or
instability, including financial instability. Such imbalances
often manifest themselves in deficits or surpluses on
the current account of the balance of payments.
Monetary policy Policies regulating the money
supply and interest rates by a central bank.
Moral hazard Moral hazard arises when a
contract or financial arrangement creates incentives
for the parties involved to behave against the
interest of others. See http://lexicon.ft.com/Term?term=moral-hazard
Orderly default When a nation's debts are restructured
in an organised way.
PSI Private Sector Involvement. (In
the current context, this term concerns negotiations
to involve private lenders, including banks,
in efforts to reduce Greek debt.)
Recapitalisation To inject fresh equity into
a firm or a bank, which can be used to absorb
future losses and reduce the risk of insolvency.
Secondary markets A market where investors purchase
securities or assets from other investors,
rather than from issuing companies themselves.[128]
SGP Stability and Growth Pact.
Sovereign liquidity The ability of a government
to obtain cash quickly.
Sovereign A government's inability to service
or repay its debt.
insolvency
SPV Special Purpose Vehicle. A company
created solely for the purpose of owning a
particular set of loans or other investments,
and distributing the risk to investors.
TEU Treaty on European Union.
TFEU Treaty on the Functioning of the
European Union.
Troika The collective term used to
refer to the European Union, the European Central
Bank and the International Monetary Fund.
Undercapitalisation Where a firm, bank or institution
does not possess enough equity to absorb future
losses or to avoid the risk of insolvency.
Writedown Reducing the book value of an
asset.
Yield The return to an investor from
buying a bond implied by the bond's current
market price. It also indicates the current cost of
borrowing in the market for the bond issuer.
127 Some definitions are taken from the following source,
with thanks: http://www.bbc.co.uk/news/business-15060411. Back
128
http://www.investopedia.com/terms/s/secondarymarket.asp#axzz1laxNZI2o Back
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