The Evolution Of The EFSF, And Its €726 Billion In Max Losses

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

The Evolution Of The EFSF

It seems so long ago, but it was just over a year ago the EFSF was first created.

The first iteration was set up in a way that although the headline number seemed relatively large, the amount that would ever be lent was under 300 billion euros as there were various holdbacks and other mechanisms to ensure as little money as possible went out the door.  The deals were also going to be structured as customized loans that if not outright senior to bonds, were at least structurally senior.  It seemed that a bad case scenario would be losses totalling 120 billion (about 40% of the maximum that could be lent out).

For awhile, nothing really changed, other than Ireland and Portugal made it clear that they would not be participating as guarantors, further reducing the potential size, and potential loss of EFSF.

As the crisis got worse this year, a couple of changes were made to EFSF.  The guarantees were increased so that the total amount of money that the EFSF could raise was about 450 billion euro.  That was the size of the guarantees of the AAA countries.  If not the only way to get a AAA, it was a relatively easy one as no fancy CDO mechanics were involved.  The 450 billion of potential issuance was backed by 726 billion of guarantees (no point counting Greece, Portugal, and Ireland), of which 450 billion of the guarantees were provided by AAA countries.  The plan seemed to change from EFSF making loans to also buying bonds.  So now the realistic loss was higher.  Lets say it could now realistically lose 60% of 450 billion, so 270 billion was likely at risk.

Then, before that was ever approved, the idea of injecting capital into banks was created.  Now, realistically, the loss rate could be higher.  Not all capital injections would be paid, so a realistic downside is an 80% loss on this mix of equity investments and bonds, a total potential loss of 360 billion.  Certainly no longer a small number.

But that wasn't enough.  Now we have a new plan.  EFSF would take first loss on the full guarantee amount of 726 billion.  Given everything that EFSF can now invest in, and the fact that it is taking first loss risk, the potential loss is 726 billion

So in a little over a year, the risk of loss transfer from private companies to sovereign nations has increased from 120 billion, to 270 billion, to 360 billion, to the possibility of 726 billion!

That seems bad enough, but the situation is worse than that.  At each turn, Greece has underperformed and been found to have bigger needs than previously thought, but the latest IMF decision to go ahead with the next tranche anyways, sends a clear signal to Greece that they are in the drivers seat.  Why do more now when IMF will keep picking up the tab until you finally decide that drachma's suit you better.

Portugal cannot be blind.  It sees where Greece has failed but still gotten money, and that Italy barely goes through the motions of pretending to try, so why should they?

Countries caught in the middle will want to tap the facility so at least it is a breakeven proposition for them (if that is even possible).

Ratings of all the PIIGS and some other countries have been downgraded over the course of the past year.

Robust economic growth has turned to mediocre performance at best.

Politicians have limited support at home to provide bailouts or to accept the terms that go with them, yet they continue to approve each bailout.  I wonder what will happen when these ones get thrown out?

There was one brief moment where Europe looked like they were ready to let Greece default, let some weak banks go, and deal with the consequences.  They flinched and are now in the process of creating a bigger mess.

If this Allianz proposal goes through, it will be curious to see what the structure actually looks like.  Nothing that I can think of gives even the senior tranches a particularly high rating, and certainly the rating agencies won't ignore the 726 billion of real risk being taken on by the guarantors.  On the other hand, DB is probably willing to structure it for 1% and S&P and Moody's would probably charge similar amounts so there should be about 22 billion of fees to encourage everyone to work hard.  22 billion seems cheap to save the world.  Though in the end, DB will probably likely only be lead as France would want some French banks to make money of the structuring fees in order to participate.  And that ignores placement fees and per annum fees.

It is truly scary how much loss the sovereigns have to take to kick this can a few months further.  And that is likely all we get as everything will truly be correlated in Europe if this new approach is done, and any global slowdown will put immense pressure on the system.  Remember, nothing, not a single thing mentioned above does anything to address that people and banks and countries borrowed more than they can pay back, and people lent to them on terms making it difficult to extract any value if they don't pay the debt back.

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Sudden Debt's picture

One could read this story and say 726 billion is a lot of money.
But it's not!!
It ain't trillions!

hambone's picture

Yeah, but once you're in for another 726billion, then you are in for the next trillion to save your 726, and then she told two friends, and she told two friends...The 726 billion in MAX LOSSES ensures this won't be the MAXIMUM LOSSES...More good sure to be thrown after bad until there is no good left. betcha; resolutions, uhhhhh, not so much.

bank guy in Brussels's picture

The hilarious cultural reference in the above post, so all can enjoy ... (Fun for some of us to be reminded of this, after so long!)

There was a really classic 'Fabergé Organics' shampoo commercial, decades back, that I recall from living in North America back then.

A girl buys the shampoo, "She tells two friends, and they tell two friends, and so on, and so on, and so on ..." and the model's photos multiply as well as the voices.

The Faberge shampoo sold well and everybody repeated the tag lines. Here's actress and popular babe of the time Heather Locklear doing it, suggestively nude with hair wet in the shower, one of the many coolly vintage TV commercials from decades back found on YouTube:

JustObserving's picture

Very true.  Per USdebtclock, US debt and unfunded liabilities increase by a trillion dollars every 42.4 days.

726 billion euros is only 989 billion US dollars.

In the scheme of US debt and unfunded libilities, 726 bullion euros is not that big of a deal. Bennie can print that in a few seconds.


slewie the pi-rat's picture

unlike our clocks, the debt clock will not "fall back" at the end of the month

traderjoe's picture

Solving too much debt with more debt. Brilliant!

kito's picture

as per sudden debt, they dont have too much debt. the u.s.a. has too much debt. 

this is TOO MUCH DEBT-----

hambone's picture

It's the EU...there working on maxing out the credit card but just a little tougher for them...anyway, EU needs, what, 2T euros to allow for Greek default (eat all bad gov debt for 400B) and then ring fence bond markets for PIIGS for 2years w/ remainder.  The 768 Maximum is just a downpayment.

Once done, Germany and France will vault past US in debt / GDP...and still nothing resolved...almost like they're being milked, bilked dry?!?

kito's picture

copy and paste this into your conscience, there is NO CHANCE THE EU WILL PASS THE UNITED STATES IN DEBT. NO WAY NO HOW EVER. 

hambone's picture

Should clarify - they would pass US present debt / GDP...however in 3, 6, 9mo from now time the German's / French get to 100% or 110% (US by then should maintain the lead in debt olympics but don't completely count out the Euro's...really no saying how far will Germans go to maintain Euro).

JustObserving's picture

If the USdebtclock is correct, 726 billion euros will pay for US debt and unfunded liabilities generated in every 42 days.

We are number 1  in debt generation   USA! USA!!  USA!!!

No one will snatch this title from us

Threeggg's picture

The problem isn't the original debt or the new debt to keep "the old" debt active, it's what happens if that original debt that needs to be paid back doesn't get paid back triggering the CDO's and CDS's.

Thats why JS's call about QE to infinity is spot on. They can't just wipe the debt off the balance sheet, because the 100 entities that bet that the original debt wouldnt get paid back (or removed from the balance sheet) wan't to get paid when they try to remove it from that balance sheet.


Backend clusterfuck loop Bitchez or CheckMate, take your pick !

DoChenRollingBearing's picture

At this point it does seem pretty clear that it is Europe first, then us.

Greece, then PIIS, then France, then California.  A slow motion trainwreck we all can watch.

Prepare accordingly.

The Navigator's picture

You got it right DoChenRB - just wish we knew exactly the timing so we could load up at the last possible moment on Au & Ag.

But, it's coming, no doubt about it - as clear as crystal if you just read ZH and nothing else.

Always Prepared (Semper Paratus), The Navigator.

ViewfromUndertheBridge's picture

I think an indicator will be GLD. Let's assume it has the gold it claims, makes it about the 5th largest gold pile after Italy I think. While the LBMA/Comex electronic price dictates the physical price I think we will see a take-down and the looting of GLD baskets for delivery.

Some time before June 2012 (PAGE) I presume.

knukles's picture

You have got to be fucking kidding me.

nmewn's picture

"At each turn, Greece has underperformed and been found to have bigger needs than previously thought..."

Because they can't support themselves and the debt load.

Deeefault a stake through the bankers heart and be done with it!

knukles's picture

Do they need a hint?

Chris Jusset's picture

Greece continues to be rewarded for slacking off and failing to implement adequate austerity and revenue measures ... and of course Portugal sees that the threats to punish Greece are never carried out, so now Portugal has a free pass to ignore austerity & revenue measures ... and the Italians abhore austerity, so now they have a free pass ... and the Spaniards loathe austerity, so they too want a free pass ... and Ireland wants a free pass ... as does Belgium ... and the Netherlands ...

So we're ultimately left with the industrious German and French taxpayers rewarding the slackards for their lack of frugality.  What a great system.

knukles's picture

Gives a Whole New Meaning to "Welfare State".

macholatte's picture

Greece continues to be rewarded for slacking off and failing to implement adequate austerity and revenue measures ....

True and everybody knows this. However, and maybe I'm giving way too much credit to the PTB, maybe, just maybe, they have a plan, or at least the intention to formulate a plan, to get rid of the deadbeats like Greece. Maybe they are thinking that what they need to do is take it one step at a time. Band-Aid the current crises and then configure how to pitch the PIIGS out of the life boat. Pipedream, right?

Chris Jusset's picture

Or, they have no workable plan, so they've resorted to applying an endless stream of Band-Aids on unsolvable problems ... kicking the can down the road just far enough to buy another week or two.  ... Meanwhile, the rest of the world is really getting sick of this bullshit.

Ancona's picture

The rock just got bigger and the hard place harder. They are well and truly fucked, yet they cannot see it through all the bullshit.

Epic fail.

Party on Garth!!!

StychoKiller's picture

Ain't there a TV repair guy somewhere with a bitchin' set of tools?

Banksters's picture

Each Slovakian now owes 1800+ dollars to bailout richer EU nations.  But really, it will all be funneled to the kleptocrats.

end da fed's picture

who in their fucking fucked up mind ever thought this fucking "system" was a good fucking idea????? central fucking bankers? did it ever cross their gd minds that if they blow the whole gd world up with this fucking shit they are fucking going down too????? i mean FUCK! its one thing to want to be a quadrillionaire but even at the expense of your very own future well-being???

hambone's picture


perhaps the dang PTB intended to destroy the strongest nations and transfer all the power to quasi private, non-democratic owners.  Or maybe greed just led us here.  Heck, I don't know.

end da fed's picture

im still trying to get this figured out because my head was up my ass until about a year ago. sorry if this a stupid question and the answer is obvious to everyone else but are these "quasi private non-democratic owners" outside the US or do they plan on hanging out here after everything goes to hell?

hambone's picture


I don't George Carlin sez, "there's a club and you and I ain't in it".

How we got so screwed up and so far down the path, was it intentional or coincidental, who knows?  All I know is where I think we are on that path and the potential implications of what we are doing...nobody really knows why we got here and how it will play out.  We're all just trying to make sense and do our best to prepare. 

Lotsa speculation on ZH but in the end you'll know best what makes sense to you.

end da fed's picture

thx i lost my shit earlier and have now gained a bit of my composure (read: jack daniels) back

StychoKiller's picture

The "Creature" still walks among us:

"The Creature From Jekyll Island, a Second Look at the Federal System", 5th Ed., G. Edward Griffin, ISBN:  978-0-912986-45-6

Prepare to see the ugly truth...

oogs66's picture

welcome to our world..but yes, as soon as you start digging beyond the headlines, do a minimal amount of fact checking you realize how messed up it all is.

end da fed's picture

and yes im replying to my own thread. i have to vent here because the rest of the gd country is to busy to listen because they r watching their dvrd reality shows.


so really... somebody thought this setup would work??? IT WONT FUCKING WORK! even serial killers dont kill enough people to make their own existence doubtful. even most fucking viruses dont kill their fucking victims until they have time to jump to another one. what did the central bankers think they were gonna do, jump to the fucking moon right before they cause earth to implode?

Threeggg's picture

I think the fiat money scam was ok for them to game, up until the invention of the Credit Default Swap. The insane amout of leverage on 1 dollar could be as high as $100. So, if they try to wipe 1 trillion off a balance sheet, there are 100 Trillion in derivitive holders waiting to get paid.

That and the legalization of the internet is what they underestimated. They can only shuffle the deckchairs so much, before the legs of the chairs are worn away and that chair becomes itself, part of the deck.

end da fed's picture

again probably another foolish question... why do we give a shit if the derivative holders lose their 100s of trillions of dollars? who holds them, banks? derivatives aren't regulated, right? if these became regulated and they weren't allowed to leverage so much would that help?

StychoKiller's picture

It would help, but it's far too late.

Google up "Black Hole" and "Event Horizon"

end da fed's picture

thx i'll look those up and i've been meaning to read The Creature from Jekyll Island

Threeggg's picture

Because the money to pay them does not exist..............yet !

Socrate's picture

Earth will not implode, but a new world war will soon explode...

GottaBKiddn's picture

It's not supposed to make economic sense, it's loan-sharking, predatory lending. The Central Bankers are simply buying the world for their masters. And it's working perfectly. Wait until the people realize that they don't own anything anymore, and that there is nothing to eat, then the action will start. They will wish they were back here today wondering what was happenning in the world, rather than having to face reality.

end da fed's picture

I hope the "masters" have people paying attention to sites like this... who do they fucking think is gonna grow all their food when we starve to death? are those mother fuckers going to go out there and grow their own? i'll be damned (and my kid too) before i'm anyone's fucking slave. i'll blow myself up and take a bunch of those lazy sociopathic parasites down with me.


thx for the info

The Navigator's picture

Reality sucks. First you take the red pill and find it's all been Alice in Wonderland, then you find everything a fucking politician spews is 100% Bullshit. Then you look around and see these millions of blank faces nodding in agreement to the BS and you say WTF, am I the only one not high on hOpium?

So welcome to the (reality) club at ZH. First you get mad, then we learn, and then we prepare. One good lesson is make sure you post while sober; otherwise risking junking.

Lotsa good info and insight here at ZH - just have to pick among the nuggets that shine and BTFD (buy the fucking dip).

Semper Peratus, The Navigator

end da fed's picture

thx i have found ZH to be theraputic. i guess im just going through the the anger stage of grief. fyi the jack daniels comment wasn't true... i dont drink... although it is looking like a better option than reality, but i appreciate your advice: "post while sober". i'm able to regain my composure a bit when i make dinner and help my son with his homework but that didn't have quite the same ring to it! thx again. im sure to have alot more questions down the road

Sean7k's picture

I'm not sure it matters how much debt they create if the people cannot pay for it. If government revenues continue to fall short and they cannot raise taxes, does it matter how much debt is created? 

If it all gets rolled up after the banks are made whole and they have invested into non-currency investments, will they not survive?

Who is more important? The banks or government? Especially when you can just create new governments with a different currency/credit scheme.

The whole debt debacle works until someone starts saying no to currency. Until then, it's just a game...

macholatte's picture

Who is more important? The banks or government?


The answer: the PEOPLE are more important than either the banks or government. A fact that has been overlooked.

Sean7k's picture

Bwahahahahahahahahahaha. Stop it, you're killin' me!

oogs66's picture

i believe that momentum is growing into a move for radical change...wait til the republicans decide the right to bear arms is a bad idea because they are part of the problem too :)

PicassoInActions's picture

Market reaction to SLovakia vote is mute...? what's up with that? Even euro is going higher.

Is ECB online pumping?

mynhair's picture

Naw, it's those 'animal spirits'.

Regularly channeled thru sheep traders.