European Bailout Time Of Death: EFSF Cut In Half Due To "Market Conditions"

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.

Comments

[plantigrade]

confidence tricks --> confidence loss

[Temporalist]

La Tribune in France calls the Sarkozy, Merkel, Monti trio "l'improbable menage a trois" :

http://www.rfi.fr/emission/20111125-une-france-allemagne-italie-face-crise

"Summit meeting in Strasbourg, French President Nicolas Sarkozy, German Chancellor Angela Merkel and the new Italian Prime Minister Mario Monti promised reforms soon to try to counter the crisis affecting the euro. But they did not say why. And Germany pushed the projects of France to transform the European Central Bank lender to member states of the euro area. The Tribune has a doubt. "The unlikely threesome," as the business paper , about this unusual trio formed by Italy came to join the old Franco-German couple." (google translation of link - http://tiny.cc/d70h3)

[falak pema]

The recent meeting of Euro triumverate shows the Euro in its current structure is DEAD. Roman history proves that triumverates NEVER work. It doesn't look good, it even looks more and more hopeless. As in the resulting spiral of "every country for itself", which will start when Greece now probably defaults in December, we will not see an attrition of EUrozone into a smaller core group. I think that idea is dead as Merkel and Sarkozy recognise that the trade surplus countries have NO long term common grounds with the trade deficit countries, warranting building a financial shield and bazooka firewall around EUro, which would jeopardise ECB/Germany, solution vetoed by Merkel (definitively?). As logical next step, the South must SEVER their linkage to North and devalue fast. As Merkel's refusal to help them financially, all the while benefitting from their markets as chief exporter; now has become an untenable economic  paradigm for the future. The TRUE, inevitable question NOW is NOT how to save the whole but how to get out of this trap without bringing the banks down.

Is this do-able, can we avoid bank Contagion collapse if EUro meltdown occurs in coming months and sovereigns leave EURO? THIS IS WHAT REALLY INTERESTS THE OLIGARCHS ON THE OTHER SIDE OF THE POND, AKA WS/FED et al.

By the looks of it; 30 T potential Euro bank sector collapse is not defendable if euro spirals to destruct. A lot of banks will go down, a lot will be nationalised, as the pain is spread around, with the spill over then hitting UK and USA markets. 

This looks like the most likely scenario after this divorce, consumated between Sarkozy and Merkel. With an endangered Monti looking on like harem eunuch, sacrificial deer in the market's careening headlights. Watch the dominos fall, watch the oncoming devaluation/deflation spiral.

[Temporalist]

Dexia's Midnight Robbers

Dexia, Franco-Belgian Bank, Using Emergency Liquidity Facilities To Tackle 'Very Dramatic' Problem

"Franco-Belgian bank Dexia (DEXI.BR) is accessing emergency liquidity facilities in Belgium, France, Spain and Italy, a banking source said on Thursday, as analysts described its liquidity situation as "very dramatic.""

http://www.huffingtonpost.com/2011/11/24/dexia-liquidity-facilities_n_11...

[MFL8240]

And the US confetti is again higher.  Golds safe haven appeal of 5000 years has been repealed it is now the US dollar which is printed out of thin air.  lol!!

[BW]

There is only one way out, balance their budgets.

[sabra1]

seems that something is keeping the european markets from crashing!

[Uber Vandal]

Wile E Coyote could spend a good deal of time in the air before gravity caught up with him too.

[Zaphod B.]

I'm right here.

Ahh, nice yields there across europe.... 7.25, 7.1, 7.35......stay up over 7%,

....as we said before....
...as it was previously reported here, here, and here"
....as it was predicted here back in (insert month)
....and presented without comment

Are my favorite ZH openers.

[youngman]

I am looking at the bond market and thinking...there used to be investors...who both bought and sold the bonds as investments...now the bond buyers are Cebtral Banks or banks with a Federal "mandate" to but the bonds......the sellers are now the investors.....my how things have changed...to me this means the market is no longer....its a liquidation entitity....but what has me confused is why the Precious metals are not skyrocketing...something is very wierd with that....German Bonds were "safe havens" until this week....so what makes people think USA bonds are safe "havens" this week..it could change .....but yet they buy..and they buy..and they buy..or I should say something is buying...

[ISEEIT]

I've believed for a long time now that this 'Euro crisis' has actually been pretty well managed, if viewed through the scope of the globalist. For all the drama and talk of crisis, the only real pain has been felt around the lesser and most easily 'consumed' members. They need things to become substantially worse as to sufficiently frighten the sheeple of Germany in particular. Once it appears that serious, immediate choas driven pain is on hand they can pull the trigger and make 'the emergency' changes required. I don't buy the thought that Germany walks. More likely a two tiered Euro with those in the lesser tier allowed entrance to the upper tier after having sufficiently trained their citizens to behave in proper serf fashion and then agreeing to surrender any meaningful soverienty. 

[chaartist]

Epic, due to market conditions...:) if someone can show me one market without intervention, I would love to trade it.