Europe Leaks It Will Fix Crushing Debt Problem With €940 Billion Of More EFSFESM Debt
We were delighted to see that the old headline scanning algos are still in charge of the FX market following "news", which were not even news, having been expected by absolutely everyone, that the EU is about to propose an expansion of Europe's bailout fund to a total of €940 billion for one year, by merging the €440 billion EFSF and €500 billion ESM - leading to a very transitory spike in the EURUSD. From Bloomberg: "European governments are preparing for a one-year increase in the ceiling on rescue aid to 940 billion euros ($1.3 trillion) to keep the debt crisis at bay, according to a draft statement written for finance ministers. The euro-area finance chiefs will probably decide at a meeting in Copenhagen March 30 to run the 500 billion-euro permanent European Stability Mechanism alongside the 200 billion euros committed by the temporary fund, a European official told reporters earlier today in Brussels. Beyond that, they are also set to allow the temporary fund’s unused 240 billion euros to be tapped until mid-2013 “in exceptional circumstances following a unanimous decision of euro-area heads of state or government notably in case the ESM capacity would prove insufficient,” according to the draft dated March 23 and obtained by Bloomberg News." Three things here: 1) Of the bombastic €940 billion in headline bailout money, only €300 billion or so will actually be available (sorry PIIGS - you can't bail out the PIIGS, also a third of the EFSF money is already tied up); 2) Europe is already preparing for the fade of the impact of the LTRO, which as pointed out earlier, has not only peaked, but courtesy of the LTRO stigma, which we suggested months ago to trade by going long non-LTRO banks and shorting-LTRO recipients, is starting to hurt all those firms who thought, foolishly, that the market would not go after them. They were wrong. And now Draghi is also boxed in an runaway inflation corner. And 3) Europe is back to the old mode of thinking that more debt will fix debt, even as the banking sector is forced to delever ahead of Basel III and due to shareholder requirements. This simply means that the eye of the hurricane over Europe's sovereign debt is about to pass. Those who miss 7% yields on BTPs won't have long to wait. Reality is once again starting to reassert itself.
More from Bloomberg on Europe's reversion to desperation.
An increase in the aid ceiling wouldn’t make the entire sum available upfront. It would require a capital call in an emergency to mobilize the ESM’s entire 500 billion euros before mid-2014.
Assuming that the temporary fund, the European Financial Stability Facility, expires in mid-2013 without making further commitments, the permanent aid ceiling would revert to 700 billion euros, according to the draft. The ESM’s provisions allow the finance ministers to raise or lower its capital at any time.
Discussion of the lending cap will coincide with a possible further speedup of the capitalization of the permanent fund. The first of five planned annual payments will be made in July and the second in October, the draft statement said.
The remaining payments may also be accelerated, with two in 2013 and the final installment in the first half of 2014, two years earlier than previously planned, the statement said.
As a result, Europe would be capable of making a theoretical three-year aid pledge of 500 billion euros on July 1 and having enough money to follow through, the European official said.
Finally, if Europe is so unstable that it takes a simple Willem Buiter report to remind that "nothing is fixed", it is only a matter of time before the €940 billion EFSFESM is doubled and then doubled again. Temporarily of course.
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