Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Wednesday, 20 June 2012

Another Cunning RescEU Plan

Exasperating is the word that most diplomatically describes Eurozone officials and politicians.

Revealing a worrying lack of fresh ideas to solve the crisis, the Eurozone has gone back to the bond buying scheme. In the hope that doing the same thing again and again will somehow yield a different result, Mario Monti has proposed peripheral debt buying by EFSF on the open market. The three minor problems with this are:
  1. ECB has bought €210bn of debt including €50 worth of Greek bonds with little to show for it. Indeed, it couldn’t save Greece even after buying bonds worth about 25% of Greek GDP or 15% of outstanding debt. Using the same metric, EFSF will have to buy more than €120bn - €250bn of Spanish debt (depending on whether one uses purchase/GDP or purchase/outstanding debt as the lower bound) to make an impact. For Italy, it is €400bn - €480bn. Now I may have forgotten my stochastic calculus but elementary algebra is still within my grasp.
    1. Available EFSF funds are €250bn[1] (very charitably allowing Spain and Italy to contribute and guarantee their own bailout).
    2. 250bn < 600bn (using purchase/outstanding debt as lower bound) < 650bn (using purchase/GDP as lower bound)
    3. Now taking out Spanish and Italian contributions, EFSF funds drop by about a third (Spanish contribution is 12.75% and Italian 19.18%) to €170bn. This still assumes that Italy and Spain will be willing and able to guarantee the bailouts of Ireland, Greece and Portugal.
    4. Non-ratified ESM is €500bn. Take out Italian (17.91%) and Spanish (11.904%) contributions and ESM drops to €350bn.
    5. Therefore total funds actually available subject to ESM coming into force: 170 + 350 = €520bn < €600bn < €650bn. It just doesn’t add up.
  2. To be able to buy every member state has to agree. Browbeating only Germany isn’t enough.
  3. EFSF needs to raise money to buy debt by issuing debt. Given that the nature of EFSF guarantees is not joint and several and bondholders are subject to domestic law for guarantee enforcement, who is going to buy EFSF debt? Yields are already trending higher.
But as a wise leader said: “It’s not acceptable that Spain, which just got a promise for support, has interest rates around 7 per cent”. Exasperating.

[1] All numbers rounded to the nearest 10bn

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