Eurozone Bailout Numbers Go Stratospheric From €440 billion to €4 Trillion

Monday, September 26, 2011

Yo-yoing markets mask the ongoing cluelessness in the Eurozone where guesstimates about the size of the European Financial Stability Fund (EFSF) have long gone stratospheric. While original plans set out at €440 billion, we have entered trillion territory by now, with the highest proposal coming from European think tank CEPS who wants to replace the EFSF framework with a European bad bank. Such a bad bank could leverage its original capital base roughly ten times to aforementioned €4 Trillion.
This record-setting figure shows that financial markets have long lost touch with the real world and would burden each Eurozone inhabitant with some €13,300 in debt.
There is only one obstacle: the EFSF has yet to come up with the first €440 billion and the list of balking Eurozone members just got a little bit longer. After initial protests by Austria, Germany and Finland it is now the Netherlands and Slovakia that voiced resentments against sinking more billions of debt into the rescue of the common currency that cannot work.

Reuters had this write-up on the latest state of the Eurozone's woes:
Europe is working to ramp up the fire-power of its bailout fund amid growing alarm over its slow handling of a debt crisis that threatens to derail a global economic recovery, but European policymakers disagree over the best course of action.
Many of the options to bolster the 440 billion euro European Financial Stability Facility (EFSF) have catches, including opposition from countries like Germany, which fears a replay of its disastrous economic policies of the 1920s.
Meanwhile, euro zone officials played down reports on Monday of emerging plans to halve Greece's debts and recapitalize European banks to cope with the fallout, stressing that no such scheme is on the table yet.
Rough calculations suggest the EFSF, which borrows its funds from the markets backed by guarantees from euro zone states, might cope with a bailout of Spain but that it would not have enough ammunition if Italy needed help.
The EFSF is already committed to providing 17.7 billion euros in emergency loans to Ireland and 26 billion to Portugal.
In addition, it takes over the remainder of Europe's contribution to an initial bailout of Greece, which is likely to require around 25 billion euros, and is expected to provide two-thirds of a 109 billion euro second bailout of Greece.
Taken together, the EFSF's current commitments total at least 142 billion euros, leaving it 298 billion euros.
A package for Spain might top 290 billion euros, according to some estimates, while a rescue bill for Italy could total almost 490 billion euros.
Some experts suggest doubling the EFSF. Others talk of boosting it to "several trillion." But the way to restore confidence, which will be determined by the reaction of stressed markets, goes beyond simple mathematics.
One way of bolstering the EFSF's size, being proposed by the Center for European Policy Studies, a think tank in Brussels, is to turn it into a bank.
This means the Luxembourg-based vehicle could lend money to countries in difficulty and turn to the European Central Bank to refinance such loans rather than having to rely solely on its limited capital base.
Banks typically lend roughly 10 times their capital, and experts who have drawn up this model believe the EFSF could do the same.
That would mean the 440 billion euros of capital in the facility could in theory be transformed into more than 4 trillion euros of fire-power.
But the reality is not that simple. The EFSF would only qualify to receive credit from the ECB that was as good as the collateral, for example Spanish government bonds, that it has to offer.
If the EFSF buys these from the Spanish government directly, then a market discount to reflect the risk of default has to be applied, in addition to the standard haircuts the ECB charges for collateral. This reduces the amount of credit the EFSF could get from the ECB.
But it is political opposition rather than technical hitches that pose the biggest and perhaps insurmountable hurdle.
At the core of these are concerns recently aired by German Bundesbank chief Jens Weidmann that the ECB may already be overextending itself.
The euro zone's central banks and the ECB have a combined capital base of 82 billion euros. It has already lent 535 billion euros to banks and bought a further 150 billion euros of government bonds to prop up the market.
So far, Germany, the euro zone's chief paymaster, and the ECB are opposed to the idea, suggesting it has little chance of making it beyond the drawing board.
So we conclude amidst all that white noise emanating from political circles:

  • The ECB is at the end of its fire power and has NO MONEY.
  • The EU has NO MONEY either.
  • From 17 Eurozone members all run deficits with the exemption of dwarf-sized Luxembourg, meaning they have NO MONEY too.
  • On the next level of debt we find regions, provinces and municipalities who have NO MONEY.
  • Go down to the consumer level and you will find still more debts, but NO MONEY.
Which leads to the safe prediction that there will be no orderly unwind of the biggest debt mountain in history but the situation will tread on from one emergency meeting to the next round of political announcements worth not more than the hot air created by their speakers.
Market participants are increasingly reluctant he ongoing stream of BS. 
Forgotten are all principles like observing existing laws. All the safeguards for the Euro from the Maastricht treaty have been ignored from the moment they should have stopped the mess from growing bigger.
If the European Central Bank will indeed cut its leading interest rate from a current 1.50% to 1% on October 6 it too will have abandoned from its single mandate of fighting inflation in order to help ailing banks with an artificial steepening of the flat Euro yield curve.
Policy makers still ignore reality. German chancellor Angela Merkel dug her heels in the ground on a German TV show last Saturday, uttering her mantra that Greece will not go bankrupt for the umpteenth time. Latest polls show that 4 out of 5 Germans oppose Merkel's position.
While the Greek have been taking to the streets, this joke makes the round in Germany:
"Why aren't the Germans openly protesting the Eurozone bailout?"
"They have no time to protest. They are working double shifts to pay the PIIGS debt."

Market participants are increasingly reluctant to buy any of the continouos stream of BS and bet on a string of defaults in the Eurozone. This trader compares the debt crisis with a cancer and sees millions losing their savings within a few months (h/t Zerohedge). Watch this fascinating moment of a trader baring his mind. One thing is certain:  This guy will never be invited to a CNBC talk show.

"This economic crisis is like a cancer, if you just wait and wait hoping it is going to go away, just like a cancer it is going to grow and it will be too late!"
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