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The ESM Has Been Inaugurated: Spain's €3.8 Billion Invoice Is In The Mail

Tyler Durden's picture




 

Now that the ESM has been officially inaugurated, to much pomp and fanfare out of Europe this morning, many are wondering not so much where the full debt backstop funding of the instrument will come from (it is clear that in a closed-loop Ponzi system, any joint and severally liable instrument will need to get funding from its joint and severally liable members), as much as where the equity "paid-in" capital will originate, since in Europe all but the AAA-rated countries are insolvent, and current recipients of equity-level bailouts from the "core."

As a reminder, as part of the ESM's synthetic structure, the 17 member countries have to fund €80 billion of paid-in capital (i.e. equity buffer) which in turn serves as a 11.4% first loss backstop for the remainder of the €620 billion callable capital (we have described the CDO-like nature of the ESM before on many occasions in the past). The callable capital is highly amusing: as part of the finalized structure, the capital call process is as follows: "ESM shareholders irrevocably and unconditionally have undertaken to pay on demand such capital within 7 days." The irony of a country like Greece precommiting to a €19.7 billion capital call, or Spain to €83.3 billion, or Italy to €125.4 billion, is simply beyond commentary. Obviously by the time the situation gets to the point where the Greek subscription of €20 billion is the marginal European rescue cash, it will be game over. The hope is that it never gets to that point.

There is, however, some capital that inevitably has to be funded, which even if nominal, may prove to be a headache for the "subscriber" countries. The payment schedule of that capital "invoicing" has been transformed from the original ESM document, and instead of 5 equal pro rata annual payments has been accelerated to a 40%, 40%, 20% schedule. And more importantly, "The first two instalments (€32 billion) will be paid in within 15 days of ESM inauguration." In other words, October 23 is the deadline by which an already cash-strapped Spain, has to pay-in the 40% of its €9.5 billion, or €3.8 billion, contribution, or else.

Spain will then have 2 years in which to fund the balance of its remaining €5.7 billion equity subscription commitment.

What happens, at least on paper, if Spain is ever "equity" deficient? Here is what the ESM Treaty has to say on this particular matter:

If any ESM Member fails to pay any part of the amount due in respect of its obligations in relation to paid-in shares or calls of capital under Articles 8, 9 and 10, or in relation to the reimbursement of the financial assistance under Article 16 or 17, such ESM Member shall be unable, for so long as such failure continues, to exercise any of its voting rights. The voting thresholds shall be recalculated accordingly.

And this:

If an ESM Member fails to meet the required payment under a capital call made pursuant to Article 9(2) or (3), a revised increased capital call shall be made to all ESM Members with a view to ensuring that the ESM receives the total amount of paid-in capital needed. The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time. The Board of Governors shall be entitled to require the payment of default interest on the overdue amount.

Source: ESM Treaty

In other words, should a worst case scenario materailize and Europe's insolvent countries are unable to even prefund their portion of the €80 billion in equity needs (forget 8x bigger capital calls), it will be up to Germany (and/or any other viable AAA-rated countries) once again to fill the hole, and at that point "The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time." The same board of Governors comprising of the same insolvent countries whose primary duty is to stuff Germany with as much of the costs as possible. We can't wait to see what punishment they dole out for Europe's insolvent (i.e., most of them) countries.

Now the problem for Spain, as has been frequently reported here in the past month, is that due to the major debt maturity hurdle in October, the country is in danger of running out of cash in the next few weeks. Adding the burden of funding an otherwise token amount of cash such as the €3.8 billion paid in capital requirement, and one can see why everyone from Mario Draghi, to Goldman, to Italy and France (but oddly enough not Germany - why? Recall that Germany needs a low EURUSD which benefits its export industry, and needs the periphery constantly on the verge of collapse - Germany does not want a strong periphery as that does not help the European mercantilist construct nor its leverage as Europe's ultimate paymaster) has been asking that Spain promptly demand a bailout, and get the implicit ECB secondary market support, so that Spain can then in turn not be a threat to the primary market monetization scheme which is the ESM.

And here is where the glory of the European close-loop ponzi truly shines:

Spain needs to request a bailout in order to have the explicit (as merely implicit will no longer do) ECB backstop, to be able to issue the debt at modest rates, to raise the cash needed to fund the ESM payment and other general "sovereign purposes", which in turn is needed to make sure future Spanish debt obligations are funded in the primary market (at least until the ESM's dry powder runs out), in order to allow Spain to continue to do nothing to fix its soaring budget deficit due to rising spending and contracting revenues, for which the market merely looks away with Draghi's blessing, until the crisis reaches the next plateau, as fundamentally the lack of cash is due to insolvency, not lack of liquidity, and breaks through it, requiring even more cash, and even more pledgeable collateral, which Europe no longer has (which then activates "Operation Obama rescue us in exchange for our implicit votes" in play" but that's a different story). And of course, for all of the above to happen, Mariano Rajoy has to be prepared for the social and political fallout when he officially cedes sovereignty of the country to the IMF, the Troika, and naturally to Merkel. Fast forward to 2014 when a Merkel visit in Madrid requires the protection of 70,000 policemen (not just the 7,000 planned for her visit to Athens tomorrow).

Some union.

Finally, the reason why all of the above is actually very much moot, is as follows. In the ESM presentation, we also get a glimpse of the combined residual ESM capacity:

In other words, with up to €292 billion already pledged out of a total €700 billion, there is just over €400 billion left for incidentals. Such as the sovereign funding cliff needs in 2013 driven primarily by Spain and Italy. How big are said needs? For that answer we go back to Ray Dalio, and Bridgewater, who recently spelled out the crux of the European situation in one simple chart:

In other words, everything Europe has "done" so far is completely meaningless. Any questions?

Full ESM presentation can be found here.

 

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Mon, 10/08/2012 - 13:03 | 2868432 resurger
resurger's picture

No!

lol

Mon, 10/08/2012 - 13:10 | 2868456 vast-dom
vast-dom's picture

how about this No -- while many will know all about this below article, the 2nd chart on production may be of particular interest:

http://www.thegoldstandardnow.org/key-blogs/1564-chinas-preparing-for-th...

 

Mon, 10/08/2012 - 13:28 | 2868507 LawsofPhysics
LawsofPhysics's picture

Right, 2017.  Good luck with that.  Dollar destuction will occur much quicker if interest rates don't start rising soon.

Mon, 10/08/2012 - 13:37 | 2868549 knukles
knukles's picture

ESM in short:

Moving money from the right pocket to the left and back again, ad infinitum.

Mon, 10/08/2012 - 13:41 | 2868568 kaiserhoff
kaiserhoff's picture

But we'll get rich off the commissions, right knuks?  Oh wait.  We don't get the commissions.  Always a day late a million short.

Mon, 10/08/2012 - 13:39 | 2868556 kaiserhoff
kaiserhoff's picture

3.8 Billion?  Must be a typo.  Surely, Tyler meant trillion or bazillion.  My dog has a billion line of credit on his bone collection, or maybe it's time to adjust my meds.  This shit just does not compute.

Mon, 10/08/2012 - 14:14 | 2868682 Doña K
Doña K's picture

<<<....pay back its debt to the ESM within a reasonable period of time....>>>

The word "reasonable" in contracts has been the most ambiguous term ever. Yea a reasonable time to pay back a trillion is 40 years considering the GDP of a small country.

I would say it should be followed by "not to exceed" and specify the max time so the attorneys do not fight for a year about the meaning of the word reasonable collecting $1000/hour fees.

 

Mon, 10/08/2012 - 13:06 | 2868445 Sisyphus
Sisyphus's picture

Yes, do you think Honey Moo Moo will have a third season in The Larding Channel?

Mon, 10/08/2012 - 13:10 | 2868459 tradebot
tradebot's picture

Or else what???

Mon, 10/08/2012 - 13:14 | 2868470 saints51
saints51's picture

What happens, at least on paper, if Spain is ever "equity" deficient? Here is what the ESM Treaty has to say on this particular matter:

If any ESM Member fails to pay any part of the amount due in respect of its obligations in relation to paid-in shares or calls of capital under Articles 8, 9 and 10, or in relation to the reimbursement of the financial assistance under Article 16 or 17, such ESM Member shall be unable, for so long as such failure continues, to exercise any of its voting rights. The voting thresholds shall be recalculated accordingly.

And this:

If an ESM Member fails to meet the required payment under a capital call made pursuant to Article 9(2) or (3), a revised increased capital call shall be made to all ESM Members with a view to ensuring that the ESM receives the total amount of paid-in capital needed. The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time. The Board of Governors shall be entitled to require the payment of default interest on the overdue amount.

Mon, 10/08/2012 - 13:24 | 2868500 dracos_ghost
dracos_ghost's picture

What is the word "Treaty" you speak of? ;)  I believe there is no such word after October 2012.

I love this nugget:

"The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time. The Board of Governors shall be entitled to require the payment of default interest on the overdue amount."

In other words "appropriate action"(using ZH's closed looped ponzi scheme) = print more money and then charge interest on that new money which will then be defaulted and new money printed ...

MC Escher's Waterfall is a good depiction:

http://en.wikipedia.org/wiki/File:Escher_Waterfall.jpg 

Mon, 10/08/2012 - 13:51 | 2868595 machineh
machineh's picture

'We can't wait to see what punishment they dole out for Europe's insolvent (i.e., most of them) countries.'

Eh, probably the same draconian punishment doled out to serial violators of the Maastricht deficit and debt criteria. That is, none at all.

'OUCH! OUCH! Herman, stop flagellating me with that hurtful wet noodle!'

Seriously -- the notion that ANY of the ESM's members can pony up billions of euros on 15 days notice is absolutely delusional. 

Isn't there a 'Payday Loan App' for this?

Mon, 10/08/2012 - 14:39 | 2868773 MillionDollarBoner_
MillionDollarBoner_'s picture

"Punishment" wears jackboots and drives Leopard II's ?;o)

Mon, 10/08/2012 - 13:10 | 2868460 CClarity
CClarity's picture

Maybe Merkel plans to announce Germany's departure from the Euro and the EZ when in Greece tomorrow.  Her gift to the Greeks "Here, you keep the Euro" We'll even invest in YOUR Eurobonds . . . at 10% if you manage to keep France, Italy, Spain and the Netherlands as part of your engine.  The Austrians and we are going to a stronger currency.  Yes, it wil hurt our ability to export to you, but it's better than this slow dangling spiral down with no way out.  

Go ahead and hyper-inflate your debt away with your Euro.  No, your deposits cannot come into German banks.  We'll be back for vacation and you can get some DMs then.  Good luck and Opa!

 

Mon, 10/08/2012 - 13:46 | 2868579 lesterbegood
lesterbegood's picture

In my opinion Merkel is a Rothschild ho. She'll do exactly as her Baron orders while pretending the opposite. If Germany burns as a result...like father, like daughter.

Mon, 10/08/2012 - 13:13 | 2868468 Vegetius
Vegetius's picture

Don't worry! The guys in the EU know what they are doing look at the A-Team they have Dragi, Barroso and Herman Van Rompuy what can go wrong?

 

Well that's great, that's just fuckin' great, man. Now what the fuck are we supposed to do? We're in some real pretty shit now man...

- Hudson

Mon, 10/08/2012 - 13:41 | 2868569 bank guy in Brussels
bank guy in Brussels's picture

We've had a number of these impossible, no-way-José EU moments in Europe ever since 2010 ...

And here we still are ... even the euro-zone still in one piece, ha!

Jim Sinclair has had it right for years - QE to infinity 'the only plan', 'the only tool in the toolbox' -

« The primary focus of QE is to prevent bankruptcy in financial entities and countries so far ...  It will 'work' [in the sense of preventing nominal sovereign bankruptcy] and that is why the wild bears on the euro are wrong. It will work. That is why the wild bulls on the dollar are wrong ...

Currency induced cost push inflation will grab the entire Western world ... a form of hyperinflation ... »

- Jim Sinclair on MineSet

Mon, 10/08/2012 - 14:24 | 2868727 CloseToTheEdge
CloseToTheEdge's picture

I'm still waiting on Jim to follow thru on that huge audit, double pay no questions asked.

Mon, 10/08/2012 - 15:16 | 2868905 youngman
youngman's picture

I agree with Jim on the QE to infinity.....but what that does is put the power in the Central banks hands and takes it away from the Politicians......I do not think they will like that to much once they figure it out...

Mon, 10/08/2012 - 13:14 | 2868471 Joe A
Joe A's picture

The pillaging of Europe in full swing here.

Mon, 10/08/2012 - 13:23 | 2868497 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You give us cash, and we will give you back more cash!!

Who can't see the ponzi scheme here?  lol

Mon, 10/08/2012 - 13:54 | 2868610 machineh
machineh's picture

"I promise to pay the bearer on demand one dollar."

Gee, thanks. But I already HAVE a dollar ...

Mon, 10/08/2012 - 14:05 | 2868645 silverserfer
silverserfer's picture

In the new world order europeans will be paid in mentos the fresh maker and they will have learned from their mistake and will not keep their savings in  Paper Mentos but in physical metos in sealed factory boxes.

Mon, 10/08/2012 - 17:06 | 2869130 Zero Govt
Zero Govt's picture

good to see our future, Mentos, peppermint flavoured currency

Mon, 10/08/2012 - 13:28 | 2868474 Dick Darlington
Dick Darlington's picture

Talking abt callable capital and European sovereign ponzi schemes...

 

EIB’s capital is owned by the 27 EU Member States. As a

common feature of similar multilateral organisations, in

addition to the subscribed paid-in capital, EIB has

subscribed un-paid capital, the so-called callable capital.

The Member States have a legal obligation to pay their

 

share of the callable capital on demand by EIB’s Board of

Directors, as set out in EIB’s Statute

 

(an irrevocable, unconditional

obligation). This legal obligation derives

from an EU Treaty, which supersedes national law. The

callable capital (which is not considered in the own

funds, nor in the Basel II capital adequacy) amounts to

EUR 221 billion, and represents a supplement to own

 

funds. The share of AAA-rated callable capital was 43.5%

 

 

http://www.eib.org/attachments/general/reports/fr2011en.pdf

 

.

 

Mon, 10/08/2012 - 14:42 | 2868784 MillionDollarBoner_
MillionDollarBoner_'s picture

Please define "irrevocable" :O)

Mon, 10/08/2012 - 13:17 | 2868481 BrigstockBoy
BrigstockBoy's picture

"Everything was falling apart. It was snowing outside. The house was freezing, so I went to try to light up the fire. That's when I noticed the smell. The firemen came and broke through the chimney top. And me and Mom were expecting them to pull out a dead cat or a bird. And instead they pulled out my father. He was dressed in a Santa Claus suit. He'd been climbing down the chimney... his arms loaded with presents. He was gonna surprise us. He slipped and broke his neck. He died instantly. And that's how I found out there was no Santa Claus." - Gremlins

Mon, 10/08/2012 - 13:17 | 2868482 tradebot
tradebot's picture

just kick the can again...no worries

Mon, 10/08/2012 - 13:18 | 2868485 samcontrol
samcontrol's picture

OT

is zh and the middle east on strike today? Just asking.

Mon, 10/08/2012 - 13:24 | 2868499 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

It is pretty quiet out there....

Mon, 10/08/2012 - 13:26 | 2868504 samcontrol
samcontrol's picture

It's always quiet before a storm.

Mon, 10/08/2012 - 13:58 | 2868622 machineh
machineh's picture

It's Columbus Day (or the Monday before it, for rigorous thinkers).

So US gov 'workers' and banksters are taking a holiday.

Any excuse will do.

Mon, 10/08/2012 - 13:19 | 2868489 jjsilver
jjsilver's picture

It's time to start arresting these criminals.

They have no  authority over us, their authority (Jurisdiction) is self-appointed, obtained through fraud, murder, lies and theft.
All the debt owed to them is null and void, for the debt is a fraud and the creditors are a parasite on mankind.

Resist them, do not bow to them, do NOT OBEY THEIR UNLAWFUL ORDERS! Arrest them!

All Public Servants and those who serve or served in uniform  honor your oath of office or step down!

5 USC § 3331 - Oath of office
http://www.law.cornell.edu/uscode/text/5/3331

5 USC § 7311 - Loyalty and striking
http://www.law.cornell.edu/uscode/text/5/7311

Neither the State Government nor the United States Government is sovereign over the People of the 50 states. They are merely agents and public servants.

Under our form of government, the legislature is not supreme. It is only one of the organs of that absolute sovereignty which resides in the whole body of the People. And like other bodies of government, it can only exercise such powers as have been delegated to it, and when it steps beyond that boundary, its acts are utterly void. Billings v. Hall, 7 California 1.

The People are the sovereign owners of America and the boss of the government. The People do not dilute their sovereignty by delegating authority to others any more than the King of England would lose his sovereignty by delegating certain powers to others. If America is to be restored to the well respected, prosperous, and righteous and free Nation it once was, it is up to We the People, the absolute sovereigns to make it happen. It is time for the American People to unite and do some house cleaning in our government.

Mon, 10/08/2012 - 13:59 | 2868627 holgerdanske
holgerdanske's picture

I agree.

American Governemt has turned what used to be a beautiful beacon of hope for all into the premier terrorist state of the world.

You really have some cleaning to do.

Mon, 10/08/2012 - 13:21 | 2868492 q99x2
q99x2's picture

Rumor has it Al-Queda is starting fires in Spain and Italy. Nato is going to have to clamp down to keep everybody safe (from uprising against the bankster takeover of their countries)

Mon, 10/08/2012 - 14:37 | 2868764 Juan Tumene
Juan Tumene's picture

The Spanish are perfectly capable of starting their own fires - no need for imports in this area.  Anyway,  aren't Al-Quaeda busy in Mali right now?

Mon, 10/08/2012 - 13:45 | 2868578 holgerdanske
holgerdanske's picture

Merkel in Greece.

7000 police to protect one person!

What if just one of them has a grudge against life, banksters, history, Germany or Merkel, or maybe even all or more?

If I were her, I would remain in Germany.

 

Mon, 10/08/2012 - 14:08 | 2868658 silverserfer
silverserfer's picture

Wrong, those 7000 police are there to protect the people of Greece from the unleasing the Merkel by Germany. 1000 times  more ferocious than the Kraken.

Mon, 10/08/2012 - 13:54 | 2868608 debtor of last ...
debtor of last resort's picture

TARGET-3. 

Mon, 10/08/2012 - 14:33 | 2868725 Element
Element's picture

 

 

The ESM Has Been Inaugurated: Spain's €380 Billion Invoice Is In The Mail

 

Fixed it.

 

" ... any joint and severally liable instrument will need to get funding from its joint and severally liable members), as much as where the equity "paid-in" capital will originate, since in Europe all but the AAA-rated countries are insolvent, and current recipients of equity-level bailouts from the "core."..."

 

Nah, it's permanent donchaknow. ;-)

Mon, 10/08/2012 - 14:27 | 2868734 Joebloinvestor
Joebloinvestor's picture

What is the next bailout mechanism gonna be called?

I say we start a contest.

Mon, 10/08/2012 - 14:45 | 2868795 MillionDollarBoner_
MillionDollarBoner_'s picture

Turdget 3 ?:O)

Mon, 10/08/2012 - 16:57 | 2869106 Zero Govt
Zero Govt's picture

call the next EU bailout fund SOAL

Suspension Of All Reality

Burusso and Van Rumpoy are both closet Marxists, they complete the unbroken line of lefties that cannot do maths, economics or reality

Mon, 10/08/2012 - 14:35 | 2868756 newworldorder
newworldorder's picture

The ZH anomaly - Readers/members question everything.

Euro Leaders/US Leaders/Central Bankers - They believe anything that is Eurocentric. You cant be a member of this group and have any doubts. Promise anything as long as it distracts the masses. Math skils not needed.

Mon, 10/08/2012 - 14:47 | 2868798 MillionDollarBoner_
MillionDollarBoner_'s picture

"You cant be a member of this group and have any doubts."

Like the Hitler Youth, then ?:O)

Mon, 10/08/2012 - 16:35 | 2869070 Zero Govt
Zero Govt's picture

"The irony of a country like Greece precommiting to a €19.7 billion capital call, or Spain to €83.3 billion, or Italy to €125.4 billion, is simply beyond commentary."

it's like a bunch of drunks with only $9.25 left to spend between them trying to carve up a fantasy $120.00 on the next round of drinks

to think any sane person can persist with the idea we are 'led' by these retards 

Mon, 10/08/2012 - 17:17 | 2869151 Herdee
Herdee's picture

The final solution if needed is to change the treaty in order to sell their gold and pay off their debts.The secret is to manipulate the price of gold high enough in order to exchange the gold for U.S. Dollars or make a deal with the Chinese.The Chinese will fund Europe but need something solid so they don't get burned.But could they do it by finding a way so that the price of gold would not fall?If it benefits both parties until Europe can reform its laws to copy what they do in the U.S.system then it could work if China in turn agrees to open its markets and dump its government run banks.But that's a very tall order.China would have to reform on a parallel basis if it wants a stable world currency which could be included in a basket of currencies.Might work at gold being 10,000 an ounce and then gradually bringing it up to 30,000 an ounce.A partial gold standard would then return to the world system as insurance against default.

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