Europe's Question Of Today: “If They Will Fund And How?”; The Question Of Tomorrow “Can They Afford It?”

Tyler Durden's picture

From Mark Grant, author of Out of the Box

Les Folies du Frankfurt

Logical Consequences and Hard Numbers

In all of the Euphoria, capital “E” intended, of Friday when everyone got on the bandwagon that the ECB, in conjunction with the EFSF and perhaps with the ESM, if it comes into existence, will save the European Union and solve all of the known and unknown problems; I found myself smiling. I have seen this rush to utopia several times before during the last two years and not once has it proved to be the correct response. We play the Great Game to win and not to be right and so I take these rushes into market madness seriously but I also know that the players in the Great Game are not an uneducated crowd and will realize grand folly eventually for what it is and it is just that; grand folly.

What everyone seems to forget during these market speculative induced highs is that someone has to pay for them. Neither the ECB nor the Fed operates on a different existential plane that is not appended to the real world of finance or either or both could balloon their balance sheet to 100 trillion dollars or Euros and so bolster the nations that they represent. I was asked Friday about Inflation and its apparent lack and the lack is decidedly true at present but Inflation is not the bogeyman at the end of the tunnel; it is Valuation that includes the currency but also extends to the debts of the EU countries and their abilities to pay their debts, the EU lenders and their ability to fund and finally to the marketplace and anyone’s desire to contribute capital and at what levels. These are the real arbiters at the end of the pipeline!

In the case of Europe we have two marked distinctions with the first being the ECB and their balance sheet which is currently at about four trillion dollars and already 45% higher than the Fed’s at $2.2 trillion. The second is the European Union’s Stabilizations Funds with the EFSF in existence and down to $65 billion in available capital, after the $125 billion for Spain, while the second fund, the ESM, is only proposed at the moment and hung up in the German courts. Both entities are mired in present and future difficulties as having bailed out Greece, Ireland, Portugal, Cyprus, Spain and possibly Slovenia and Italy in the not too distant future. All of the talk of firewalls and those moments of Euphoria have quite obviously achieved nothing as Spain has fallen and Italy is about to fall (my opinion) and so the mis-direction is apparent from what was really important, the financial capabilities of Italy and Spain, and the firewall distractions accomplished nothing but a few moments of respite. Whether it is the Stabilization Funds of the European Union or the placing of debt and securitizations at the ECB in the end, and it will be recognized I assure you; someone has to pay for all of this and there is the rub so often overlooked or perhaps pushed to be ignored by the nations in Europe. I submit that the final act of this great drama will occur when the world (ratings agencies and investors) looks around and notices this reality.

If we were to suppose that Italy, Spain, Greece, Portugal, Ireland, Slovenia and Cyprus need some sort of help then this equates to a European Union whose capacity is diminished by 27.01% in their ability to fund as these countries cannot help (source: Eurostat). If we utilize these same countries at the ECB then then capacity of the European Central Bank is reduced by 26.092% (source: ECB). Then if we look at just one specific country, Greece, and they defaulted on their $447 billion in public debt it would wipe out the capital at the ECB which now holds the vast majority of Greek debt outstanding (estimated at $283 billion) and which, as of December 28, 2011 (source: ECB) had $13.236 billion in paid-in capital from Europe’s central banks. A Greek default would also cause a massive Target2 default where approximately $123 billion is pledged in collateral from the Greek banks and guaranteed by Greece. Then there is the $144.53 billion in Greek loans in the EFSF fund that would be decapitated by a Greek default. The total public debt then for Greece which is defined as either their direct sovereign debt or debt that is guaranteed by the government of Greece is $714.53 billion which does not count their $90 billion in derivatives or their private corporate debt or government guaranteed non-bank corporate debt or the non-guaranteed bank debt of the country.

Greek GDP as of December 31, 2011            $298.1 billion

Greek Debt to GDP ratio                              239.69%
(EU Acknowledged Sovereign Debt Obligations)

Total (All In) Greek Debt                              $1.3 trillion   

Total Greek Debt to GDP ratio                      436.09%

Never forget; there are two sides to the European fiscal proposition. There are the funding nations and the borrowing nations and I suggest that the focus of the markets will soon turn to the funding countries and their capacity to provide capital without endangering themselves. I think the attention of the markets is about to turn to Germany and France, the largest components of the European Union, and with GDP’s of $3.2 trillion and $2.77 trillion respectively the question is going to come around to just how much these two countries can support without sending themselves into a serious economic quagmire. The EU officially recognized sovereign debt of Greece is now 22.33% of the GDP of Germany and 25.80% of the GDP of France. The banks in Europe dwarf the sovereigns with balance sheets three times larger than of all of the EU nations and with Spain having now fallen and Italy about to go; just how much that can be afforded is quickly coming into the focus of many money managers.

The question of today may well be, “If they will fund and how?”

The question of tomorrow is going to be, “Can they afford it?”

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Gandalf6900's picture

uuuuuuuh...with my money

King_of_simpletons's picture

"Golden Elephant No. 38"


Facebook, Zynga, Groupon, Retirement Funds, Munis are all examples of Golden Elephant No. 38.

MillionDollarBoner_'s picture

"Golden Elephant No. 38"

CEO Mr Pon Zhi

CFO Mr Fuk Yu

King_of_simpletons's picture

and introducing Average Joe: Fuk Me.

GetZeeGold's picture




Are you going to tell Joe......or did you want me to do that?


old naughty's picture

How do you say: "I want to go back to the old Happy E-Union" Greek, Spanish, Italian ...?

We could "afford" it then !?

mjcOH1's picture

"The question of today may well be, “If they will fund and how?”

The question of tomorrow is going to be, “Can they afford it?”"


- Yes. 

- By printing.   (If not by the ECB, then rolling up the debt to the debtor of last resort - the USA, with printing by the Fed).

- Until the ink merchants refuse to ship further .... which did eventually happen with Zim-dollars.

Sudden Debt's picture

that's already pledged to be taken...

it's your kids and grandkids money they're looking at... so you better start making some more kids...

10 or 12 or so...

and make sure they land jobs that make 200K a month because otherwise the math won't work...


Alcoholic Native American's picture

The status quo is expensive. Empty out your pockets peons!

tok1's picture

please enough with this propaganda EU total debt to GDP is 80%  US is 105% Japan 230% and UK is 90%  why do you keep implying that the group with the lowest debt to GDP has the biggest problem. The only difference is EU is trying to deal with their debt directly as apposed to haveing the central bank buy it every day (hello FED

if EU has a serous Govt debt problem the US/Japan/UK will be in more trouble or have failed currencies. The only group trying to deal with the siutation is the one being bereated



Vincent Vega's picture

"if EU has a serious Govt debt problem the US/Japan/UK will be in more trouble or have failed currencies."  BINGO!

scatterbrains's picture

"BINGO" is what the pimply fat kid in Utah is going to say as he toggles the USAF drone over your head if you dare to point that out.

Gandalf6900's picture

there is no dealing with the situation, there is only subscribing to more debt...thats the name of the game

Haager's picture

You mustn't exclude private debt. Hint: any bank bailout recently?

Dr. Engali's picture

We all know that. The difference is the fact the U.S. can print at will. It's a bit more difficult for the ECB to print. Having said that all the fiat currencies are doomed at some point.

DeadFred's picture

The ECB can't print. It's that simple. For all us bears this looks like a good day. Overbought futures up on nothing, this is when the 'surprising' bad news gets dropped on the market and it corrects downward. My guess.

shovelhead's picture


Germany won't let Mario run the presses and you can't run a Ponzi game without new inputs.

Hence the ,ahem, difficulties.

Gonna stink without dat ink.

And tomorrow's another day.

Not exactly a scintillating analysis of the situation but accurate nonetheless.

eddiebe's picture

They will have to fund or break up the Euro. That was implied when all central banks went to fiat. Now it's a race to the bottom playing follow the leader: the main helicopter pilot Ben. Of course they can afford it, what a stupid and misleading question. 

MillionDollarBoner_'s picture

The answer is "Nein"

Now what was the question again?

rsnoble's picture

The US couldn't afford bailouts but have been doing it by the trillions for years now so when tshtf ill believe it when I see it. I know it will happen, just not sure when. Certainly looks to be close but these bastards are like trying to grab a greased up frog.

LeisureSmith's picture


Or something completely different and more complicated.

Nachdenken's picture

The Math is right, the concluding questions are neither today nor tomorrow, they were 2010. The funding is contrived, and they could not afford it from the first bailout plan. 

Psper profits fund real  losses and the numbers look good.

Sudden Debt's picture

Maybe if we elected a president that would CHANGE everything?

Just look at the US how they are so much better of with... WHOEHAHAHAHAHAHA!!! Just kidding :)

We're all fucked!


-50% DISCOUNT!!!!*

*if you pay in any currency that's not the euro



billwilson's picture

The US is in just as bad shape. It only survives because it is given more rope by the market. Nothing has been fixed, the ponzi continues, money is printed, debt is increased, all looks wonderful on the surface .... in reality, earnings are phony, employment levels are phony ... all propped up with artifically cheap money. If the US took the steps Europe is taking, it would be in even worse of a pickle ... with a horde of overweight undereducated moronic citizens more intent on watching Idol, then actually doing anyhting.

shovelhead's picture

America's different.

We have Bennie and Timmeh riding to the rescue.

nah's picture

the banks have the money bitchez

SwingForce's picture

The clock keeps ticking but nothing else seems to change

Problems never solved, just rearranged.

"How will I laugh tommorow, when I can't even smile today?" -Suicidal Tendencies


Dareconomics's picture

Mark Grant, via ZeroHedge, actually takes us through the math of Greece, which is a proxy for the other failing countries.

A Greek exit would cost €1.3tr! Once Greek left the Eurozone, the other countries would begin exiting, too, in order to avoid holding the bag. You see, once a country leaves, it raises the liabilities of the other members.

This dissolution and the resulting chaos cannot be allowed to happen. Therefore, the euros will do anything to avoid this outcome. Greece will continue to be strung along so that ECB losses on its debt do not have to be recognized. In fact, I think Spain will get the same treatment. It will get just enough aid to keep it going.

What could interfere with this plan is social unrest. If the people decided that they have had enough austerity, then the ruse is over.

jonjon831983's picture

Guessing they'd just empty out social security/pension funds via "borrowing" a la debt ceiling 2011.

Then comes the printing.


Well... unless SS+Pension are already empty.