If only we had known that the EFSF was nothing but the latest Chinese reverse merger IPO gimmick, dependent entirely on market conditions for its success, we probably would have sold even more euros to Thomas Stolper. Alas, despite all the pomp and circumstance of last month's European summit announcement when the 50% Greek debt haircut (which has a snowball's chance in hell of passing) was accompanied by vague promises of a 4-5x leveraging of the EFSF's €440 billion, it now appears that our original skepticism was well-founded. Because according to the latest news out of the FT, the EFSF won't get 4-5x leverage. Nope. It will, in fact be lucky if it can be doubled, which however kills the whole point as it needs to be well over €1 trillion to even exist. From the FT: "A plan to boost the firepower of the eurozone’s €440bn rescue fund could deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month, according to several senior eurozone government officials." Well what do you know. Next we will learn that when the EFSF denied it was an outright pyramid scheme, and was buying its own bonds, it was actually kidding. Either way, as it currently stands, there is no bailout in place for Europe whatsoever, as the ECB's demands for a fallback to the ECB are now moot. Furthermore, once the market realizes there is no even implicit backstop to the trillions in debt rollover over the next several years, it will dump sovereign bonds with even more gusto, pushing Europe into an even deeper funding crisis, which in turn will make bond repayment even more impossible, which will send prices even lower, and so on. There is a reason they call it a toxic debt spiral.
From the FT:
The dramatic spike in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover.
Klaus Regling, head of the EFSF, earlier this month said that overcoming investor concerns with improved guarantees would mean the fund was likely to have only three to four times the firepower – an admission that underlined the challenge European leaders face in steadying sovereign debt markets.
But three senior eurozone officials said even this lower target may be difficult to reach, and expect the eventual firepower to be between two and three times the remaining buying capacity of the fund. “It is falling well short of its billing,” said one. Concerns over leverage will be a key item on the agenda of eurozone finance ministers meeting on Tuesday.
These officials are also pessimistic about the prospects of a second source of leverage, a co-investment vehicle designed to entice investors from emerging markets. One said the idea was given a such a tepid reception by China and Brazil that is may struggle to amass funds.
Time for another summit:
Leveraging the EFSF’s dwindling resources was the main element of a grand plan unveiled in October to create “firewalls” that stop fallout from Greece spreading to European banks and its largest economies, particularly Italy.
But the rise in Italian and Spanish borrowing costs to painfully high levels has underscored the severity of the crisis and reopened the debate over more radical alternatives to boost the clout of the rescue fund. An added worry is the risk of a possible French downgrade, which would significantly sap the strength of the EFSF, as the fund is built on guarantees from “AAA” rated countries.
Alternative options include fresh guarantees or injections of money, the use of the EFSF as a bank, or steps to bring forward the European Stability Mechanism, Europe’s permanent bail-out fund, so that it runs alongside the EFSF instead of immediately replacing it.
Given the highly volatile markets and uncertainty over future European Central Bank interventions, it is almost impossible to predict the value of bonds the EFSF will eventually be able to insure.
Of course, none of these "options" will have any credibility absent the arrival of the ECB cavalry, which as of today we know is going nowhere... fast.
As for the EFSF's failure, it was obvious the bailout mechanism was dead when its yield was trading at well below AAA levels, as first reported here two weeks ago.