EU - EFSF & ESM - A Whole Lot Of Nothing

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,


A quick look at the headlines:


€200 billion already committed.  So the EFSF has already committed €200 billion.  So far I only see €63 billion of debt issued by the EFSF, so they have at least another €137 billion to fund.  The bulk of their issuance so far is back to back with a they made to Greece, hardly the best collateral.  For now I’m going to assume that there is no overcollateralization requirement and just €200 billion has been committed, but if the 165% overcollateralization is in place, then that would really be €300 billion of “guarantees” used up.


The “Permanent” facility would be allowed to run in conjunction with the EFSF.  As far as I can tell, basically each and every country would need to approve this.  Most countries seemed to have only approved a maximum amount of support that could be allocated between the EFSF and ESM.  Will they really all sign on for more?  I find it hard to believe that Finland will be excited by the prospect since they already negotiated their way out of standard EFSF and into some form of collateralized lending.  Slovenia had enough trouble the first time around, so why would they want to?  Cypress seems to be getting dragged down by the Greek economy.  Poor little Estonia must be wondering when the Eurovision song contest got all mixed up with this Eurozone concept.


For now, let’s assume that every country approves running the ESM in conjunction with what has already been committed (I find it hard to believe that everyone will agree, but let’s just make it easy for now).  Then the EU has €500 billion of new money to play with – allegedly.  It has all become such a blur, but the ESM had the same concept of “stepping out” members and potential overcollateralization that I am not sure that €500 billion is achievable.  I think it is only a headline, but again, let’s pretend they can get to €500 billion.

Okay, let’s make a capital call for the full amount.  I will assume it is based on the same percentages as EFSF with the 3 stepping out members.  Italy, please pay €96 billion.  Spain, we need €64 billion from you.  Where exactly are Spain and Italy going to get that sort of money to pre-fund the deal?  They aren’t.  That is the big scam here again.  It is “self-insurance”.  The vehicle will not be pre-funded in a meaningful way since the countries don’t have the money to put up.  There may be some amount of paid-in capital, but it will be small.  Then the ESM, just like the EFSF (which may still need to issue €137 billion) will issue bonds whenever it needs money, and only use the “capital calls” in extreme circumstances.  This is actually far worse than having the money up front – as problematic as that may be, because this plan will shift virtually the entire burden to Germany and France if it ever gets used.


Let’s say that Spain finally decides it needs money and actually “steps” out.  When each of Greece, Portugal, and Ireland used the EFSF facility for money, they “stepped” out.  That is both reasonable and logical.  But what does that mean to France and Germany?  With Spain participating, they had to put up €145 billion and €109 billion respectively.  If just Spain steps out when they need money, the contribution rates for the other countries goes up.  Now Germany, France, and Italy are on the hook for €167 billion, €125 billion, and €110 billion.   Let’s now assume that when push comes to shove the Finns and all the small contributors decide to “step out” too.  The problem is getting too big and they realize they are just hurting themselves more by participating than they would be affected by actual defaults.


Then the big 3 go up to €175 billion, €132 billion, and €116 billion.  Also Belgium, not the best credit to begin with needs to cough up €22 billion.  Are they really going to be there for that money when called upon?  Getting paid in capital is problematic, and may even actually count against deficits, but not getting paid in capital is more dangerous.  You are counting the commitments of people who need the money.  It is like me getting a loan from the bank and trying to make them more comfortable by telling them, not only will I co-sign my own loan, but I will give them a guarantee that I will pay it back.


Nothing has changed.  These are the same people who constantly try to overwhelm current problems with huge headlines and promises of a better future.  They don’t have the money, and never will.  They also promised speculators in Greece would lose their shirts.


Maybe they can get the paid in capital by having LTRO3.  Spanish banks can issue bonds to themselves.  They can get Spain to guarantee those bonds.  They can then pledge the bonds to the ECB.  Then they can take that money and buy Spanish government bonds.  Spain can use that money to fund their share of ESM.  Then they can get ESM to give them more money, partly coming from other countries.


And yes, the IMF is our money and if they fall for this, it is just shameful.


I have ignored the other potential bit of money, where “if in an emergency” and only for up to 1 year, could residual EFSF money be used.  All the same problems as getting money from the ESM when Spain or Italy needs it, coupled with actual votes.  Not worth including in your calculations, in spite of how quickly the media has rushed to get the bigger headline out.


We need to see the details, but be prepared to be underwhelmed.

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-1Delta's picture

"step out"


they will fucking run out... not just "step out"

RollinsArline3's picture

my classmate's sister makes $67/hour on the laptop. She has been without a job for 6 months but last month her pay was $20212 just working on the laptop for a few hours. Read more on this web site .....

CaptainTripps's picture

and the market is selling off all day on the news they likely knew for weeks

Mercury's picture

The Euro Shuffle

crisis-->confab-->catered lunch-->print-->swap-->promise


q99x2's picture

They need to give me money so I'll stop doing anything. I'm tired of everyone else getting money for nothing. When's my turn.

TViX up another 18% today. Sure you don't want to get some while it's low?

distopiandreamboy's picture

Quarterly opex is whats driving TVIX for the most part.

The worst trader's picture

Got in to uvxy on monday and loving it! Cramer who?

GeneMarchbanks's picture

'Cypress seems to be getting dragged down by the Greek economy.'

Always good to get the opinion of someone who endlessly repeats himself and seems to think a type of tree is floating around in the Mediterranean.

no life's picture


SillySalesmanQuestion's picture

Breaking news...OT, Sir Douchebag Jamie "Sleazebag " Dimon is going to be interviewed on CNBS soon to blow smoke up asess...Warning, view if you can without shooting your T.V. Now, back to regularly scheduled bullshit.

gatorengineer's picture

Money will come from Ben Bernanke, whether it is sterilized by the IMF or not..... He just put long range tanks on the helicopter....  Fed is buying Eurocrap debt remember, and not a congress critter from either side said a word......

newworldorder's picture

You are correct. Sit back and watch the "master manipulator" at work. We all have a long way to go as the US Government will not object. The FED has implicitly become the world's central bank. Who is going to complain?

HD's picture

US voters. Regardless to the trickle down miracle claims - most voters care more about the price of gas and food then they care about the DOW.

Almost every central bank is printing like there is no tomorrow. More Ctrl + P from the Fed will only add fuel to the fire by November.

pashley1411's picture

When the Eurozone gets in gear they sure kick poor ole Lewis Carroll's butt, don't they?   What's down-the-rabbithole in 17 languages?

The whole exercise is so that when the credit event hits and bondholders call to get paid, they hand you a yellow dog-eared phone book and wish you good fckin luck.

Sandmann's picture

Many many years ago near Love Field in Dallas was a Thrifty Car Rental station which provided amusing customers to make the wait go away. One cluster was a fat overweight, probably welfare trio, that insisted they must have the same Lincoln Town Car they rented every time they drove to Alabama to see family. So this was 'credit-card millionaire'  driving the big car to impress distant family. This is Europe. One big dysfunctional family with lots of sub-branches all pretending they have the big car but hoping they don't have to find cash to pay for it.

There are no solvent countries because there are no solvent banks and they arrived here after spending decades gouging the Ordinary People.....that is why hundreds of thousands of people with balloon mortgages in England find that the Investment Geniuses who were building the matched equities and with-profits portfolio to pay off the note cannot deliver. Bull Markets for as long as red Ferraris were available for Midas Fund Managers do not seem to have trickled into Mortgage Accounts largely because they siphoned the funds off to pay for Mis-Selling Scandals and to pay off the deficits in earlier maturing notes.

Finance is a Scam and Europe thought it was so much more genteel and refined to "make money" rather than "make things" so now Europe cannot travel in the big car because it has neither cash nor credit


HD's picture

Liars NEVER change their story. Especially when it's for the "greater good".

noob's picture

...the "nothing"(s) have never changed.

zippy_uk's picture

Tyler - lets not get too down on this concept of "nothing" as it has some advantages - like there is an infinate amount of it.

No wonder Europe has identified "nothing" as an essential resource to collateralise all its debts. Far easier to produce than "gold" for example...