EFSF: Germany's Plan Is Sovereign Default NOT Bailout
Following up on our earlier observations on the Spiegel article about Germany change in posture vis-a-vis the European Stability Fund, here are some additional very critical observations from Thermidor:
There have been rumors in the market for a couple of weeks that the German Finance Ministry has been working on a Plan B for the EU bailout and now Der Spiegel is carrying the story (below). I think this will come a big shock to the market, which I believe has assumed that while we were lacking detail, the broad thrust of how the EFSF would be utilised was agreed i.e. that countries like Spain unable to role their own debt would turn to the fund that would in turn raise the money in the collective name of the EU. However, I’m been told that in reality the details of how the EFSF will work are still highly fluid and will remain so until a member is forced to draw on the funds.
With that in mind German officials seem to have made their move and are pushing what amounts to a bank bailout/sovereign default plan on the lines of what we have seen in places like Argentina rather than a straight sovereign bailout. Bottom line: private creditors would face substantial haircuts on their holdings. Indeed, Der Spiegel is suggesting 50% and I believe these sort of numbers make sense, although the exact details would be worked out by a “Berlin Club”, which itself would be based on the Paris Club. That would leave the EFSF to be used by various national countries to bailout their own banks with exposures to the defaulting nation, which I’m sure would be far more palatable to the German electorate.
Why the hell are the Germans willing to upset the apple cart at this stage? Well it appears there are two clear motives. The first is a fear that the existing bailout package, which domestically is seen as ‘hard working German taxpayers bailing out lazy Greeks’ is immensely unpopular and hence potentially carries both a high fiscal as well as political cost for Merkel. Secondly and perhaps more importantly the Germans realise that the existing plan by not reducing the debt burden of the debtor nation doesn’t improve their competitiveness or solve the problem. What happens in 2013 when the EFSF runs out and Greeks have a debt to GDP of 150% to roll? Default and restructuring are the only options
Once again, the Spiegel article can be found here.
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