According to flashing headlines, the CDO better known as the European Financial Stability Fund will be increased to guarantee €780 billion in the future, up from €440 billion currently (the same EFSF which currently sees Greece, which has no money left at all, guaranteeing €12.4 billion of European bailouts). This was largely expected previously as many had noted that the EFSF in its current form is insufficient to cover the liabilities of Spain once the country is swept away to the Greek insolvency tsunami. Alas, for the EURUSD which is seeing this as good news, and has surged on the announcement, this development actually means that Europe is taking proactive steps to fund Spain imminently when the house of cards start falling potentially as soon as Tuesday night. This is nothing but a Spain, and then Italy, backstop. However, for Italy to be covered, expect the total covered amount to be €1. 5 trillion. Did the Eurozone just blink?
Of course, the idiot market surges on the news, as it only sees more good money being thrown after bad.
Here is a reminder of our take on the insufficient funding in the EFSF's current configuration:
It's Official: There Is Not Enough Money To Bail Out Spain
It seems that the European bailout buck will stop with Portugal for
one simple reason: when Europe created the EFSF it did not think it
would need to serially bail out everyone; now the EFSF does not have
enough money to cover a bailout of Spain. From Dow Jones: "The European
emergency fund, promoted as having the financial firepower to douse a
financial crisis in the euro zone, may not even have enough money to
cover a bailout of Spain. "[The fund] will be very close to the line, it will be precarious and it won't leave anything for anybody else,"
said Whitney Debevoise, a sovereign-debt lawyer with Arnold Porter and
former World Bank executive director." Of course, if and when Spain is
bailed out, other bail outs will be irrelevant, as at that point the
vigilantes will focus squarely on Germany. At that moment, nothing less
than a complete dissolution of the currency union and an unmitigated
monetization ala Weimar will save what is left of the productive powers
remaining in Europe.
From Dow Jones:
EU has EUR440 billion committed from member countries to its European
Financial Stability Facility, the fund being used to extend bailout aid
to Ireland. Requirements by European officials that the bailout bonds
have a triple-A rating lowers the EU's lending capability to EUR250
billion, in addition to EUR60 billion available in the EU budget. The
International Monetary Fund has said it will lend an additional 50% to
If Ireland requires between EUR80 billion
and EUR100 billion--as officials indicate--and Portugal needs an
estimated EUR50 billion to cover its sovereign debt refinancing needs,
that barely leaves enough to cover Spain's sovereign debt rollover
requirements over the next three years. Greece's EUR110 billion package
was arranged before the bailout fund was set up.
said an IMF official, is that Portugal and Spain may also ultimately
need to fund banks' recapitalization or wholesale liabilities, and the
European bailout mechanism just doesn't have the capacity to cover those
"The [bailout fund] as it is currently
structured does not have the firepower without a much, much larger
contribution from the IMF," said Jacob Kirkegaard, a research fellow at
the Peterson Institute for International Economics. "But how much does
the IMF as a global institution want to be exposed to Europe as a
region?," he said.
Although only Ireland has so far requested
aid from the joint European Union-International Monetary Fund program,
fears that Portugal and Spain may need external assistance have already
spiked the cost of borrowing in both countries' sovereign and banking
debt markets as perceived risks rise.
Both the EU and the IMF declined to comment for this article.
last is not too surprising: an admission that the EMU is over due to
lack of foresight to add one extra zero may not be to most politically
correct thing to do. But luckily, there is always the IMF, which
courtesy of its recent amendment now has infinite capital. And if Europe
needs bailing out that means Europe won't be paying for that particular
multi-trillion rescue. Which leaves guess who. Hopefully, Bernanke's
foolproof plan of ultimately flooding the world with US dollars is
starting to be perceived by everyone.
So what does happne when domestic sources of funds are exhausted? Nothing pretty:
funding could come through bilateral loans from countries heavily
exposed to Spain or extra International Monetary Fund support. But
tapping out the EU's emergency financing mechanism would leave nothing
for other countries and may force Brussels to try to boost the funding
cap to save the euro zone and leave Europe stretched critically thin.
from direct bilateral loans, such as those being considered for Ireland
from the U.K., Sweden and Denmark, Debevoise says EU countries may have
to boost the cap on their bailout program, a politically difficult task
for a raft of reasons.
"At that point, it will be to save Europe, saying, 'this is your political duty,'" he said.
how they don't call it patriotic... Because don't forget that the EMU
has been around for a decade: it a modestly difficult to engender
patriotic affiliation with a monetary union, whose sole purpose just like the CNYUSD peg by the way is to keep the German "currency" undervalued, which everyone hates.
The endgame? Unbridled printing:
willingness of the political sector to overcome what I believe will
ultimately be proven to be an irrational liquidity squeeze by the market
cannot be underestimated," he said.
That commitment to the euro
zone is so strong, Kirkegaard says, "The European Central Bank would
purchase outright with printed money Spanish debt before the Spanish
government was forced into a disorderly default."
is one thing Bernanke will not allow. And should there be a liquidity
crunch, every single European bank will need dollars. Many trillions of
dollars. Which will be unavailable in the open market, leaving just the
FRBNY's FX swap as a viable option. Of course, should Europe pursue a
monetary policy in true independent isolation, and should the tsunami of
dollar buying actually occur, the resulting historic surge in the USD
may just end up being the most poetic end to the currency bottom...
for those who still may be confused by how the various bailout
mechanisms in Europe operate, we present to you this useful infographic
by the Guardian.