Everything You Wanted To Know About EFSF (But Should Be Afraid To Ask)

Tyler Durden's picture

With the weekend full of on-again-off-again comments from various European, Asian, and US politicians and central bankers with regard the chances of various incarnations of the EFSF solving all of our ills (or not), Nomura's Fixed Income Research team has what we feel is one of the most definitive analyses of the various options. We have discussed the self-exciting strange attractor nature of the endgame that will be a leveraged EFSF many times recently. The Nomura team, however, does a great job of breaking down various scenarios, such as Structural Weaknesses of EFSF 2.0, Proposals for an EFSF 3.0 (and their variants), Leverage-based options, and EFSF 2.0 as TARP and how these will result in one of three final outcomes: fiscal union, monetization, or major restructurings risking the end of the euro, as everyone searches for a steady state solution to the 'problem' of the eurozone.

While the most elegant solutions have no official sanction, we think the necessary political resolve is yet to be forthcoming, and the technical issues are challenging if not insurmountable for many of the legal workarounds, resulting in the need for yet another round of parliamentary approvals. Consequently, we see a significant risk that the market, looking for large headlines and enhanced flexibility, will be disappointed at least in the short run.


The search for a steady state solution

In analyzing the eurozone debt crisis, the key challenge is to assess the likely path towards a steady state solution, defined as the market no longer being concerned about future default risks on government debt – at least over a time-frame that is meaningful to immediate asset allocation decisions. We have highlighted three broad alternative steady state solutions:


1. Full fiscal union and the issuance of Eurobonds with a joint and several liability structure or at least unconditional credit risk transfers to stronger countries for a extensive period of time (for sustainability to be reestablished).


2. Aggressive policy reflation, whereby the ECB significantly expands its balance sheet and its SMP program. (Given the requirement of EU governments to recapitalize the ECB, this option ultimately begins to blend into option 1.)


3. Default and debt restructuring in selected non-core countries and possible end of the euro area.


Option 1 is not under consideration at this juncture since all forms of recent fiscal or credit transfer appear to come with strict conditionality. As for the possibility of Eurobonds, it has been dismissed by the AAA countries and the German Constitutional Court?s ruling that uncapped liabilities accruing to the German state from its participation in the EU is unconstitutional. Option 2 may be a possible solution to the crisis, albeit with drawbacks, but our economics research team does not believe that the ECB is close to accepting the significant increase in credit risk on its balance sheet and the distorting influence on its monetary policy that this option would entail. The ECB is not programmed for full-blown monetization and the bar is extremely high for any major steps in this direction. For these reasons, the possibility of further debt restructuring in selected countries has become increasingly likely and in recent weeks has underpinned investor risk allocation decisions. The consequences would depend on the ability of EU politicians to isolate other periphery countries and European banks. This may prove virtually impossible without significant credit risk transfers, so ultimately European politicians will need to pick one of the three outcomes: fiscal union, monetization or major restructurings risking the end of the euro area.




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Spitzer's picture

The ECB doesn't want to print. These are stall tactics. Printing is not as complicated as this post makes it out to be.


Who is John Galt's picture

Sung to the tune of the great Frank Zappa's Bobby Brown:

"Hey there, people, Im Ben Bernanke
They say Im the cutest boy in town
My car is fast, my gold teeth is shiney
I tell all the girls they can kiss my heinie
Here I am at a famous school
Im dressin sharp n im
Actin cool
I got a CNBC cheerleader here wants to help with my paper
Let her do all the work n maybe later I'll rape her

Oh God I am the american dream
I do not think Im too extreme
An Im a handsome sonofabitch
Im gonna do god's work n be real rich

(doin god's work
doin god's work
doin god's work
doin god's work)

Womens liberation
Came creepin across the nation
I tell you people I was not ready
When I fucked this fag by the name of Timmy
He made a little speech then,
Aw, he tried to make me say when
He had my balls in a press, but he left the dick
I guess it's still hooked on, but now it prints too quick

Oh God I am the american dream
But now I smell like vaseline
An Im a miserable Jewish sonofabitch
Am I a boy or a lady...i don't know which

(I wonder wonder
Wonder wonder)

So I went out n bought me a leisure suit
I jingle my change, but Im still kinda cute
Got a job doin bankster POMO
An none of the jerks can even tell Im a homo
Eventually me n a friend
Sorta drifted along into s&m
I can take about an hour on the tower of power
Long as I gets a little golden shower

Oh God I am the american dream
With a spindle up my butt till it makes me scream
An I'll do anything to get ahead
I lay awake nights sayin, thank you, Tim!
Oh god, oh god, Im doing god's work!
Thanks to Timmy, Im a sexual spastic
And my name is Ben Bernanke
Watch me now, Im goin down,
And my name is Ben Bernanke
Watch me now, Im goin down, etc."

Market Efficiency Romantic's picture

no offense, but your long-gold pushy postings becomes a little inflationary itself. I gues the ZH world has realized that fiat expansion theoretically even further drives the gold price. But recently, besides further QE delay, strategic action has negatively influenced gold. So why are you constantly pushing so hard? So deep down? Such general inflationary reminders don't really help your point.

Spitzer's picture

im not your average anti fiat golf bug

HedgeAccordingly's picture

thnx for sharing

at.least the futures are red. Asia seeing red .. golden holiday

 http://www.hedgeaccording.ly/2011/10/s-sunday-evening-look-uup.html .

papaswamp's picture

Man the Greeks are trying to soak the Germans for every last Euro....

TruthInSunshine's picture

Eurozone fix a con trick for the desperate

Financial Times - 6 hours ago
  • On talk of designing a leveraged ESFS (that essentially acts like a CDO):

"It is the last confidence trick in the toolbox of the truly desperate. The eurozone is about to kick the can a final time." 
p.s. - Paul Krugman, the idiot whose Nobel Laureate village is deperately missing him, is demanding further debasement of the purchasing power of Americans, because he claims doing so will resolve the unemployment crisis (little does Krugman, idiot non-savant, know that there's only been massive job losses for the last 11 years, during a time when the USD has been debased about as badly in any decade+ period as ever. Krugman should be branded as a financial terrorist. https://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html...

[W]e need to make American products more competitive, which in practice means that we need the dollar’s value to fall in terms of other currencies. Yes, some people will shriek about “debasing” the dollar. But sensible policy makers have long known that sometimes a weaker currency means a stronger economy, and have acted on that knowledge.

chump666's picture

A 100% a con-job, one I think the Germans are gonna get very pissed off about...


knukles's picture

It troubles me greatly to contemplate such let alone share, but for some oddball reason, I just had a mental image of Dr. Krugman's complete salvation, redemption and atonement of sins in the form of water-boarding.
Which is wrong. 
Desperately, improperly, inappropriately, unforgivingly wrong. 
Yet entirely fitting.

There, I've admitted my wrong to God, myself and other human beings and hereby shall attempt to never ever again have such dark thoughts concerning another person's abysmal lack of common sense let alone knowledge.
God help me be strong.
I shall read Maureen Dowd to be saved.

r00t61's picture

You can't be arrested for having bad thoughts.

At least, currently.

Thoughtcrime might be prosecuted in our dystopian future.

disabledvet's picture

Not true. And Justices are watching btw since it is so illegal we still don't have laws against it.

scatterbrains's picture

not arrested true but as a propagandist he is now a drone attack target.

zhandax's picture

God help me be strong.

If I am to be damned to hell for my belief that Krugman should swing from a rope for his contribution to the debasement of the currency, so be it.

Hephasteus's picture

Debasing the currency to make exports more attractive is the central bank equivalant of building slave ships and shipping your ass off to foreign cotton farms. The problem is the slave ships are all parked off the coast of greece and nobody wants the shit in them.

BORT's picture

Take a look at the four year comparison of Spy vs. HSI.  SPY is now 15% heavy.  Oops

Cliff Claven Cheers's picture

Sunday, Oct 02, 2011 11:43 PM

. . . . . . . . . . . . . . . . . . . . . . . . . 

 ECB's Noyer says that a bigger EFSF is unrealistic. 

philipat's picture

But also that he is favour of the CDO-squared approch thus solving the problem of too much debt by creating yet more debt. This will not end well.

traderjoe's picture

Fact: you can't fix too much debt with more debt.

TruthInSunshine's picture

Not according to Krugman.

He is demanding 80 trillion be spent on shovel ready jobs, employing people to dig the U.S. out of debt.


p.s. - Japan has officially lost roughly 30 years of Nikkei NOMINAL gains (and about 45 years of inflation-adjusted gains), and China's HangSeng is done about 4.5% and it's getting uglier.

I'm so glad we have Keynesian Paper Printers at the levers of the helm of the global economy /sarc/.

DormRoom's picture

And if 25% of the population becomes jobless, who will consume the products and services from small & medium sized businesses, that can't outsource to other countries?  

knukles's picture

Paul Krugman and His Merry Band of Cadillac Commies, Limousine Liberals and Associated Subscribers to the New York Times.

God, please do something rotten with This Man.
And all those who believe in Him.

BigJim's picture

And if the government has to tax the small & medium sized businesses to pay for the shovel-ready jobs, how will those small & medium sized businesses compete with those in countries that aren't ruled by Keynesian madmen?

The money to pay people to do non-productive jobs has to come from somewhere... some 'where', where it would almost certainly be more productively used.

zhandax's picture

Fact: You can't fix stupid.  Therein lies the demise of fiat.

chump666's picture

Lock in re-structure, Greece first then Italy and Spain.

Merkel conned the Germans that the 40% of their taxpayer monies was to bail out Greece...Like ZH says, it's going straight to a EZ TARP program.

One word...disgusting.

zorba THE GREEK's picture

Germany now sees the light. Greece is only the tip of the iceberg. There is no way they can bail all the PIIGS out.

Germany is headed for the exits ASAP. They have been printing D-Marks and have asked the printers to speed up

the process. With Germany out of the EZ, they will have only one real option. Print their way out of debt.

The Euro will go to parity with the dollar and eventually lower, maybe back to 80 cents. European banks will be bailed out

minimizing colateral damage to U.S. banks. U.S. will print to bail out states and keep economy from going off cliff. 

The dollar won't take a big hit because of the weak Euro. All will be well again (at least for a while) in fantasy land.

disabledvet's picture

Yes. It really is this simple which is why I was waiting for someone else to say it. Still too many outliers.

defcon's picture

Germany, France, Holland, Switzerland, Austria, Denmark, Belgium and Czech Republic are pretty much one single economy, whatever they do, they will do it together. Italy and Spain are too big to fail, in case of default they would drag down France and UK together with them and that would create a chain reaction. Only Greece and Portugal (maybe Ireland too) are small enough to be let out without any major repercussion on the other European economies.

chinaguy's picture


But a good overview of how investors trying to hedge HY Chinese bonds spread contagion:


chump666's picture

The hedge funds will short the hell out of China/Asia CDS's, on the back of huge YUAN selling.  Australian markets are going to ge hammered.  just saw the AUD go through the 0.96 handle, large sell.

dr.charlemagne's picture

i really cannot fathom how long it is taking people to get bullish on metals. I guess that there are still a bunch of smart people who see nearer term gravy in the dollar and treasuries. I also guess that there a bunch of very rich people who do not really understand finance and ecomomic who are taking direction from their investment bankers who, of course, will be the last on earth to recommend the obvious, that is, take refuge in physical (non-paper, non-fee generating) precious metals. Further, I guess that so much as a fart in the treasuries market and whaamo!!!!.... the precious metal assume their rightful place as the chief holding of the wealthy.

DormRoom's picture

the USD is the most liquid currency in the world, and backed by the most powerful military force in the history of civilization.  Near term, it's safe & liquid.


Also, don't you have to convert gold to a fiat currency before you can buy something?  Seems a bit of a headache to


use fiat > buy gold> exchange to fiat > use fiat.


When you can


exchange to USD > use USD

James T. Kirk's picture

So, DormRoom, which of the large investment banks employs you as a troll?

BigJim's picture

Seems a bit of a headache to use fiat > buy gold> exchange to fiat > use fiat.

I have yet to see anyone advocate using anything other than surplus fiat (ie, savings) to buy PMs... or anything else where there is a bid/offer spread.

Are you really the best they can come up with these days? Troll fail.

RobotTrader's picture

AUD/USD just wiped out a year's worth of longs.

U.S. Dollar bears must be retching.

chump666's picture

check HK stocks...short sell overkill

phraseshifter's picture

yeah...what's it mean?

Tuffmug's picture

None of the options which Nomura suggests can be implemented because the European Union has become totally dysfunctional. It is best described as a European DISUNION. The only thing these guys can agree on is which 5 star resort to meet and party at. I see no political agreement and no greek default as even that requires a political will to do so. They are unable to do anything.

Consequently, I expect that they will continue to circle jerk around until the triggering event of a sovereign bond market collapse for Italy, Portugal, and Spain  (very soon now given the recent auction bid to cover numbers and their near term funding needs). At that point it won't make any difference what they do as the bond markets will do a Lucy and pull away the can as they attempt to kick it down the road. 

tom a taxpayer's picture

Agree. My guess is that it is +90% that irresistible market forces overwhelm the dysfunctional EU and trigger the sovereign bond collapse; less than 10% that the European House of Babel muddles through.

Maybe Dexia will topple Belgium. Maybe Belgium will make a last minute spurt and beat Greece to the default finish line. Maybe the final collapse of the European Disunion will be triggered by Brussels, capital of the EU. Poetic justice.


knukles's picture

I have a solution.
Well, more like a partial solution.
Or maybe just a good beginning.
See ya'll got me here late in the evening gettin' all riled up about Paul Krugman, Maureen Dowd and Tommy Freidman, for I truly do not think that there might be a singularly more useless collective repository of mindless leftist pablum than those three at the New York Times.
So on to the "final solution" with them, then.
Super Glue their fingers to the vowel keys on their keyboards.

Probably has a reasonable chance of enhancing the NYT's pay readership base come to think of it.
And what a damnedable correlation and in fact I'd go so far as to suggest causation, paralleling the decline and fall of America.  During my adult lifetime (which many would claim to be somewhat short) the NYT has gone from an established newspaper of record to an instrument (and not very good) of semi-illiterate propaganda.
Why, at one point the paper's by line was "All the News That's Fit to Print" which has since deteriorated to "All the News that Fits".
Viola!  Proof positive that taking melodramatic socialist dogma from the Op-Ed pages and apportioning it liberally (LOL) amongst the News Items is a reason for the news paper's demise. 
And society as well.


Then again, this has fuck all to do with Nomura's analysis which was far too long and involved, assumes too may well machined moving parts and logical interactions (adult like) amongst vastly differing competing agendas.
The real answer is that it's fucked in the short, medium and long terms, will devolve back towards (note, only towards, not to) the good olde days of the French hating the British (or something else as wonderful) will melt down and disappear in a manner identical to the fall of the Berlin Wall.
One morning, it just won't fucking be there and the Whole World Will be Better for It.


And so the moral of the stories are don't read the NY Times and be long of bonds and gold.

Hephasteus's picture

The french are just being conformist. Everybody hates the british.

disabledvet's picture

They were always the bad guys in the original Star Wars trilogy. I always found that aspect to be highly entertaining.

Chaffinch's picture

Alec Guniness was British - he was a good guy.

falak pema's picture

He was like Peter Sellers : totally malleable actor, capable of playing three roles in one movie, like Sellers did in Dr Strangelove, and Guinness did it eight fold in 'Kind hearts and Coronets'. In 'the lady killers', he starred with Sellers at his beginning. He was awesome in 'Bridge on river kwai' and in 'Lawrence of Arabia'.  Brilliant movies, brilliant actors, and...all cultural tagging of nations as bad or good is like saying : the only good spaghetti is made in little Italy; you know that's biased...So is the rest!

slewie the pi-rat's picture

i vould like to buy a wowel:  an "0" please? 

two "0-0's"? 

no-moora?  no-moora bailouts?  now justa moora "indemnifying" the fuking banksturds? 

no-moora re-defines bailouts;  krugman and friedman agree (editorially and w/out fingerprints) that dowd is starting to taste like almonds.  calamari almondine...???

the EFSF would be "efficient" if it is used to indemnify the fuking banks? 


fuk the NWO, BiCheZ!!!

and fuk paul krugman!  the man has printing press envy, and is a nightmare of pathology as is the nyt w/ its monetary corpo-fascist zionism, but i'm repeating myself.  again

Martin T's picture

EFSF is a CPDO redux. Highly toxic in essence, no cash buffer or guarantees. Very risky.





Edward Fiatski's picture

Bulls' nuts were cut off in this analysis paper. :X

falak pema's picture

Efsf : Merkel or Wuthering heights...She is scared of dizzying heights of EFSF delights!

Germany in the crossfire of the Euro, five legged animal and two headed donkey.