Doubling Down On Bailout CDOs: EFSF Guarantees To Be Raised From €440 Bn To €780 Bn As Europe Prepares For Spain Failure

Tyler Durden's picture

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
European countries.

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.

The problem,
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
financing gaps.

"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.

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qussl3's picture

So every EU nation taking on more debt is somehow bullish for the EUR lol.

Fucking retarded.

phungus_mungus's picture

I think I just short my shorts... 

johngaltfla's picture

Just remember:

It's only called monetization by normal people, not banksters.

WOW. Short the dog snot out of FXE on this news....

hugovanderbubble's picture

Because GCC,(gulf Council Countries and) Asean Central Banks are buying Euros(Acting as pseudocollateral) for the ECB-

johngaltfla's picture

Yup. Buying Euros with Dollars. Perfectly logical. Trading less valued shit for more shit.

SheepDog-One's picture

The new global shit trade, just got to have new skills to figure out which giant piles of shit are more desirable than others. 

hugovanderbubble's picture

All fiats are broken, but which gonna be fast diving one?

Imho , USD is not as bad as people says, ---"a dollar is a dollar" and more with Precious Metal Commodities Currency Linked Markets.


I prefer to hold USD than Euros in the long run, but of course its my humble opinion

SheepDog-One's picture

I prefer my AR15 and lots of ammo for whats coming next...I do have a sack of dollars for fire starting kindling and toilet paper though.

Absinthe Minded's picture

Dup. Frickin' Ipad. If I had some ketchup I'd eat it.

Absinthe Minded's picture

My wife thinks I'm nuts. I've got cases and cases of TP in the garage. She never bitches when she thinks where out and I pull another case out though. I like my Mini 14 though, try to buy local. Sturm Ruger is 50 miles up the road from me.

TooBearish's picture

BUY the EUR great news - where is this money coming from ? Trichets and Junkers colons? comon

hugovanderbubble's picture

Im telling whole ZH members Qatar (QIA)s gonna invest in Telefonica ...

Flow Analysis --------------Smart Money coming to Spain (at discount) but final orders.

Thomas's picture

I think we need an FDIC Failed Country List. Every Friday night we could count how many countries will get rolled up, reliquified, and renamed over the coming weekend.

topcallingtroll's picture

Money is created by central bankers, no problem creating a bit more.

Quintus's picture

Indeed not.  The problems only arise when you try to spend it and find that prices have mysteriously gone up in line with the amount of new money that has been printed.

SheepDog-One's picture

Thats the bitch of it, cant print fast enough to keep up with prices rising, vicious ass kicking circle. The central banksters are again at blowout stage where a 'do over' is required, last one was WW2.

Reptil's picture

Agreed. A reset is imminent. The big question is "in what form?".

I think better get it over with now, while the bankers are not in complete control (or about to lose it) to have some kind of influence in the construction of the next system. The whole "taxpayer as backstop" is just a way to put parts of society in an (awkward) position, when SHTF. Everybody an RFID with some "imaginary money" is not my idea of a basis for a free market, or society.

got gold?

SheepDog-One's picture

Oh, well where did that money magically appear from, pot'o'gold at the end of an Irish rainbow?

Why dont they stop all the games and just announce theres $100 trillion in the Euro bailout fund, $1 quadrillion US debt ceiling raise, and free ketchup with every IPad then the world is no longer bankrupt and starving!

snowball777's picture

EUO for flinching.

topcallingtroll's picture

The germans will blink first.

A compromise will be found and greece will get this round of bailout money.

A huge temporary relief rally will ensue.

Paralympic Equity's picture

Nice (NOT), but I don't see how this can be decided like this, without any meetings

writingsonthewall's picture

I have discovered why there is no revolution in America yet.

"I heard the latest crowd control weapon in the US was a gun that fires donuts and cheeseburgers."


Is this true? - is this how they are keeping a lid on it?

Don't forget 'IMF Money is mainly US money" - surely it's time to get angry america?


SheepDog-One's picture

Yes and on top of that dont forget douchebag Mitch McConell and man-tan Boehner are now quite eager to raise the debt ceiling far as it needs to go to ensure perpetual can kicking and debt for US 'Merikans...hell what do they care anyway just keep the unemployment and SNAP cards rolling in, its all good.

Absinthe Minded's picture

I bet they did great in "Social" Studies in school.

oogs66's picture

Hasn't EFSF only issued 10 billion of bonds so far? 

Can EFSF still get AAA rating if so many countries drop out and with the downgrades/negative outlooks some remaining countries have experienced?

Version 7's picture

No way. The Finns and the Dutch will never agree on that, plus the possibility of the EU

printing its way out of it will never get Germany's agreement, as they still have a pretty harsh memory from hyperflation in the 30's. Economies the size of Spain or Italy are too big to qualify for a bailout, and this would be the final endgame for the €.

qussl3's picture

Funny how the krauts want to have a weak "hard" currency isnt it?

wandstrasse's picture

there is no endgame, the desired final crash will never happen. If the system crashes, all fiat would be worthless within days, many people would die, but all bankers would be NAKED and DEAD, too. This is why it will NOT happen. When will the sun go out, again? in a billion years or so. There are many, many future generations to enslave and pay back the debt plus interest. The frogs will be cooked slowly. Stop dreaming of a final crash. It will not happen.

Version 7's picture

The system is definitely not on the ascendance. You say "but all bankers would be NAKED and DEAD, too." The risk of the financial system collapsing is sytemic, it's here, and it is structural. It won't go away. Ask the people of the UK or the US for another bailout - which will have to happen sooner or later.

wandstrasse's picture

The risk of the financial system collapsing is sytemic, it's here, and it is structural.

yes, of course - and you say it, the RISK is there, it has been since 1913 and it was maximised in 1971. The RISK. But it has not actually happened and it will not happen. The most sensible and best thing for everybody would be to let the PIIGS default, to let their own, new currencies find their market value etc. But this is simply not possible - the several 100 trillion of CDS notional amounts would be due... even god would not be able to print this amount whithout letting everything completely collapse. There will be bailout after bailout, money will be printed just to pay interest, and as I said, there are almost endless future generations who can be enslaved to pay interest.

Version 7's picture

Let us not get enslaved by a lack of hope in the first place.

wandstrasse's picture

I know what you mean and you are right, but one can also be enslaved by 'hopium'.

Corn1945's picture

Right. That crash three years ago must have been in my imagination then.

wandstrasse's picture

I think you know well what I mean, 2008 was a MARKET crash. I am speaking about a SYSTEM crash. I read it 1.000 times and I acknowledge that all fiat currencies eventually failed and disappeared. But in history currencies and systems had competetion. Today there is only ONE system on the entire planet and there is only fiat money. And the plutocrat/oligarch owners of the planet are too powerful to let THEIR system collapse and to watch themselves being replaced by whatever else.

Brick's picture

Kicking the can stops when one of the ratings agencies downgrades France on its liabilities to various bail out mechanisms.

S&P is quoted as saying in December
If the French government fails to meet its budget deficit targets, the long-term sovereign credit rating could come under downward pressure.
Standard & Poor's said budgetary measures implemented so far would likely be insufficient to meet the proposed target.

Does pouring money into bail outs sound like meeting deficit targets to you?

Silverhog's picture

We need to fast forward to the end of this shitty movie. I've gained 15 pounds eating popcorn.

Absinthe Minded's picture

+1 !
I think we're going to need a sense of humor to deal with what's coming. Watching Bberg with Lucy Liu and they're wondering if this soft spot is "transitory". I'm getting so sick of these terms and catch phrases. We're fuckin' broke. How's that for fuckin' transitory, bitch.

alien-IQ's picture

I'll be looking to short the E/U in the 1.4285-1.43 range.

I don't see this news as having much traction.

oogs66's picture

yeah, this seems like some last ditch attempt.  EFSF has only issued 10 billion, so not sure a lack of funds is the current issue

only thing i can think of is Germany decided they could screw their citizens by providing guarantees to EFSF rather than lending money to Greece directly?  a horrible lie that should backfire massively, but might make sense to a politician

alien-IQ's picture

yeah...considering the timing of this news, it just feels like some desperate attempt to keep the markets from dipping below the 200DMA.

I set an overnight cover order on my E/U short and sure as hell, it covered 12pips above the overnight low. I love it when a plan works. Waking up with profits already made beats the living daylights out of waking up and facing rush hour traffic to go to a shit job. :-)

Now lets see if I can get it right twice in a day. I Just opened a short starter position at 1.4296. I'd look to cover at 1.4220...

PaperBear's picture
"taking proactive steps to fund Spain imminently when the house of cards start falling potentially as soon as Tuesday night." AAAAARRRRGGGGGHHHHH "It's Official: There Is Not Enough Money To Bail Out Spain" HOLY S**T !!!

"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

NO, NO, NO. "But luckily, there is always the IMF, which courtesy of its recent amendment now has infinite capital." I heard that the IMF was broke so where did this infinite capital come from ? Out of thin air which means credit/debt. But debt is not captial. "The endgame? Unbridled printing" HELL NO, HELL NO, HELL NO.
lizzy36's picture

CDO superhero to the rescue:

Tense INDIAN's picture

i dont remember the dialogue exactly ...but it went something like this ..."....when the chips are down , these CIVILIZED people will eat each other"

SheepDog-One's picture

Most americans dont know how to eat anything other than pre packaged burgers and fries.

decon's picture

Glad to see you with posting privileges Lizzy.  You've always been a voice of reason.