Another Failed Grand Plan In Europe

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,


The last hour has spewed forth more disingenuous clap-trap from European finance ministers. From 'sufficiency of the firewall' to the 'absurdity of Spain needing a bailout', it beggars belief that these humans can look at themselves in the mirror every morning (as they feel the 'need' to lie' - or are simply ignorant of the reality).

European Sovereign Yields have been under pressure for most of the last month...seems the market doesn't buy the firewall idea...

The EFSF has committed €200 billion.  Depending on how you viewed EFSF, the maximum was €440 billion of funding at the AAA level (which it still has from Moody’s and Fitch).  It could have been as much as €500 billion if it wasn’t focused on that maximum rating.


So how did we get a headline of €800 billion?


€200 billion of EFSF money that has already been committed got counted.  They can’t commit it again.  Yes this is money Europe has committed (more on how they fund it, later) which helped, but it cannot be committed again.


They also included €49 billion and €53 billion of loans already made to Greece under other EU programs as part of the firewall.  Again, that €100 billion has already been spent, so it doesn’t really add anything.


Prior to today, the EU had €300 billion of remaining capacity and had spent or committed €300 billion.  Now they have €500 billion of free capacity.


Let’s take a deeper look:


Last fall, Greece, Ireland, and Portugal had just over €600 billion of admitted debt (not the guaranteed hidden kind).  So far, they have received €300 of EU commitments.  Can we assume that a “bailout” is about 50% of a countries debt?  Probably not, but it seems that the first round is less than 50%, but as it goes on, the amount grows beyond 50%, but it is eye opening, that 3 countries, with a total of €600 billion of debt, have needed €300 billion of support already – and look likely to need more.  Ireland is getting a new extended payment plan.  Portugal seems likely to need more.  Greece may need more already to deal with the English law bonds, but in any case will likely draw down more.


So this €500 billion that is remaining, has to not only continue to support the existing countries, but in theory needs to deal with Spain and Italy.  With €700 billion and €1.6 trillion, that seems dubious, especially once the mechanics are understood, but before we get to that, let’s look at what the EFSF has already done.


EFSF has committed €200 billion, but so far has issued only €63 billion of bonds (including €9 billion of money market funds).


So EFSF has to come to market with €137 billion soon.  That money only gets the highest ratings if it relies on the guarantees of the top 6 countries.  The risk on this money is mainly taken on by Germany and France.  Fortunately for them, these risks don’t show up anywhere in their current budgets or debt.  They should.  The risks are real.


€30 billion of the EFSF bonds were issued to holders of old Greek bonds as PSI.  In order to account for this “liability” the EFSF needed to create an asset. It did, it lent the money to Greece as part of the bailout.  There is some sort of “co-financing” arrangement between the EFSF and Greece that allegedly mimics what the public sector got.  If that is the case, the EFSF already has a €24 billion hole (their €30 billion asset has a market value of 20%).  Who knows what exactly the EFSF is committing to, but some of it is likely to be equity in banks as part of recapitalization of bad banks.  The likelihood of getting all that money back is zero.  In fact, with how bad Greece is, and how desperate everyone seems to find only band-aids, it is more likely they lose 100% than that they recover 100%.  So the EFSF’s €200 billion is likely to have serious losses, and even today an assessment of the value of their assets vs liabilities would be horrible.  We will see whether those losses are shared by everyone, or eventually wind up in the lap of France, Germany and the Netherlands (Finland already got collateral for much of their EFSF exposure).


So, a good portion of the EFSF’s existing commitments are due to lose money, and the EFSF is yet to fund much of the commitments.  They will be able to fund it, because of their rating, and because the ECB will happily take EFSF bonds as collateral, but following EFSF more closely is important.  At some point in time, someone in Germany will notice that their guarantees have become losses and actually do count.


ESM – Paid-in Capital? Not so much


Today’s press release actually had a lot of numbers, unlike many prior press releases.  Conspicuously absent were the amounts of paid-in capital.  The timeframe was mentioned, but the amounts were never discussed.  One would almost believe that by 2014 the ESM will have its full paid-in capital.  Actually, it will, it is just that the amount is €80 billion, not €500 billion.  You would like to think that the total paid in capital will be €500 billion.  It won’t.  It is only designed to be €80.  That is consistent with the 15% minimum target.  So once again, ESM will not have much actual capital, and will rely on issuing bonds based on future commitments and guarantees. 


This is where things really start to break down. 

Portugal, Ireland, and Greece may need more money.  Fine, the ESM will either use up capital that has been paid in by all the members or will issue bonds and fund those requests.  These 3 countries have already “stepped out” so don’t contribute to ESM.  Since by then EFSF will have issued €200 billion of guaranteed debt, the total program will be over €200 billion.  How much appetite is there if the credit quality of the remaining guarantors continues to get worse?  France will have 95% debt to GDP in 2014 if they meet their aggressive targets.  Those don’t include losses on their bailout contributions, so could easily get much worse from that, let alone for a slowing economy.  I think there are real issues with how feasible it will be for the ESM to issue that much debt based on guarantees.


But that isn’t the real problem.  What happens if Spain wants money?  Spain will then “step” out.  Spain will not fund themselves.  They are likely to do this ahead of one of the scheduled “paid in” capital calls, since it would make no sense to pay in capital once it becomes inevitable that it will need money.  The moment Spain “steps” out, what will other countries do?  If I’m one of the small, relatively weak countries, I run for the hills.  If Spain is stepping out and asking for money there is almost no chance of the firewall working.  So I would keep my money and start protecting myself from the fallout rather than giving away my last bit of money in a futile effort.  If Italy needs to tap the “firewall” it is lights out.  Not only are Spain and Italy the 4th and 3rd largest “commitment providers” they have debt that is so big, €500 billion is barely a drop in the bucket.  The entire burden of a Spanish or Italian bailout would almost certainly fall on the shoulders of France and Germany as both Spain and Italy would “step out”.  If Italy tried to remain and play the good technocrat puppet, how long would the market be able to resist selling off their debt based on the new commitments?  Probably only until traders could stop laughing at the hubris of Italy throwing money to Spain.


So at some point in the near future there will be about €40 billion of money sitting in the ESM and a bunch of promises from countries failing to live up to existing debt obligations, and that is the big firewall?  The correlation between who is providing the guarantees and who will need them cannot be ignored.  This new €500 billion number doesn’t exist, it’s not just meaningless, it’s non-existent if Italy or Spain needs money.


People can take away whatever they want, but unlike LTRO which had real injections of liquidity, this is just like the July plans from last year and the November “grand” plans.  It sounds great, especially when too many people are willing to blindly follow what the politicians want them to, but it doesn’t work in practice.

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BKbroiler's picture

the pain in spain is hard to contain

BKbroiler's picture

the fleecing in greece is always increasing

DorseyCecil68669's picture

my friend's aunt makes $72/hr on the internet. She has been without work for six months but last month her payment was $19183 just working on the internet for a few hours. Here's the site to read more .....

Buck Johnson's picture

Spain was coming and everybody knew it.  They just couldn't put themselves to do anything about it.

BrokeDayTrader's picture

Default already, bitchez!!!

What the hell is taking so long?

Why does this crap keep dragging out?

The invisible hand always appears at the last second

Tsar Pointless's picture

Roses are red

Violets are blue

If you don't see this as bullish

Then you don't have a clue

francis_sawyer's picture

  From 'sufficiency of the firewall' to the 'absurdity of Spain needing a bailout'


"Subprime is contained"...

~ Ben Shalom Bernanke

devo's picture

Something is rotten in the State of Denmark, bitchez

SheepDog-One's picture

Nevermind, no one cares as the only thing that matters, stocks, are at highs of the day. Hooray for full retard USA equities.

devo's picture

But Apple is down $10, so it is trading at a discount.


Xibalba's picture

You guys see this report on metals manipulation? :


"This report provides proof of massive manipulation 

(suppression) of the gold price since the US sovereign 

credit downgrade on 5 August 2011. There are scores 

of “smoking guns” in the pages below. Rigging the gold 

market violates Section 1 of the Sherman Act and Section 

9(a) of the Commodity Exchange Act under US law."

SheepDog-One's picture

Hell what hasnt been manipulated and rigged? Stocks, bonds, commodities, data, all of it has been. What theyve really done is show that none of it is real and you'd have to be insane to put any money within reach of these pirates.

Sophist Economicus's picture

Smells like the 'Emperor has no clothes' observation is starting to take root....Shouldn't be long now.   Buy the shiny while they are still keeping it affordable...

Piranhanoia's picture

Would it be wrong to assume that everything a financial institution says is a lie?

Would you risk a copper Canadian penny with one of them? 


Vince Clortho's picture

10 years from now, what will be worth more?

1.  Confederate Money

2.  Federal Reserve Notes

3.  Arcade Tokens

4.  Copper-clad pennies

devo's picture

Copper pennies and nickles are the silver quarters of this generation.

Ben Burnyankme's picture

You left off number 5 and my choice:

5.  Double rolls of toilet paper.

Pancho Villa's picture

Actually I think Confederate Money is already worth more than FRNs. For example, right now on eBay there is a Confederate $10 note for sale and the current bid is $35.99.

ffart's picture

Hey at least the Confederate money would've been fully redeemable after the war was over. What can you say about Fed notes?

Belarusian Bull's picture

Where are those bottle caps from fallout universe in your list?

Bunga Bunga's picture

77. Confederate Reserve Notes



Big Ben's picture

Whenever you hear about new plans to strengthen the firewalls and so forth it means just one thing: trouble is coming.

skepticCarl's picture

Mr. Tchir's point of view is that the European sovereign debt is basically a math problem, and that at some point in the near future, math proves that a complete breakdown of the system will occur.  This same reasoning has been discussed for more than one hundred years.  I have always heard that the U.S. is broke, the U.K. is broke, that Japan and every European country is broke.  Yes, of course, they are.

But that doesn't stop the game, because the 1% make the rules as they go along.  There is no final score or time limit to the game. There is no debt limit. Is that not obvious? 

The deck just gets reshuffled from time to time, some new rules are announced, and the game continues indefinitely.  The best that we 99% can do is keep abreast of these new rules, and play along. Wishing and hoping from the sidelines that the rules won't change, and that the game ends, somehow in our favor, gets us nowhere.

chinaboy's picture

Game while they can (and why not). It is either entertaing or educational. No one really cares except if they are " fixed income investors" (or Germans for that matter).

chinaboy's picture

The Europeans are fully professional and artful at this game.

falak pema's picture

who wants to buy onasis's island?


Bunga Bunga's picture

Beware when you are offered an island at low tide.

Poor Grogman's picture

I look forward to the doubling down again next year.

Our economic system is getting easier to predict as we enter the exponential debt accumulation phase.

The eventual reversal however,

Now that WILL  be mind-blowing...


Zero Govt's picture

"This new €500 billion number doesn’t exist, it’s not just meaningless, it’s non-existent.."

Hey, this is Europe ..where socialist idealism does not have to meet capital reality at any point in the 'policy initiative' ...until the train wreck anyways!!

"So once again, ESM will not have much actual capital, and will rely on issuing bonds based on future commitments and guarantees."

And we all know what "promises, promises" are worth from politicians ..f'n worthless, like the Eurocrats themselves

ESM/EFSF : a circus for clowns, grab your popcorn for the drowning