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The Full Math Behind The "Expanded" European Bailout Fund

Tyler Durden's picture




 

As noted earlier, futures this morning are higher despite a plethora of economic misses (and despite 57% of March US data missing as per DB), simply on regurgitated headlines of an "expanded" European €7/800 billion bailout fund. There is one problem with this: the headlines are all wrong, as none apparently have taken the time to do the math. Which, courtesy of think tank OpenEurope, is as follows: "The real amount of cash that is still available to back stop struggling states, should it come to that, is only around €500bn." Of course, that would hardly be headline inspiring: recall that that is simply the full size of the ESM as is. But even that number will hardly ever be attained, and the ECB will have to step in long before Europe needs anything close to a full drawdown: "The problem here is that if it’s too big and terrible to ever be used, it’s likely that it won’t ever be used. Even jittery markets will be able to figure out that a large fund which would damage French and German credit ratings if ever extended will never be fully tapped. So clearly some circular logic at play. And let's not forget that it’s still far too small to save Italy and Spain should if worse come to worse." Circular logic? Check. Another check kiting scheme? Check. Spain and Italy still out in the cold? Check. Conclusion -> buy EURUSD, and thus the ES, which has now recoupled with every uptick in the pair, but not downtick.

From Open Europe:

Who's Afraid Of The Big Bad Bailout Fund?

 

Update - 12:10: Eurozone finance ministers have already reached an agreement and put out a statement. It's pretty much exactly as we expected, with all assigned funds being rolled into the headline lending volume to give the €800bn.

The fact remains though that, even combined, the funds will not be able to introduce more than €500bn in fresh lending. This was the aim all along. In fact, all eurozone finance ministers have done is correct a previous mistake which would have limited the combined lending capacity to €300bn (as originally the treaty essentially specified that only €500bn in loans could be outstanding at any one time). There should be no illusions that this changes almost nothing (we expect not even the markets which have been reacting to every piece of news will be moved much by this). One thing is for certain though this is a clear win for Germany.

Eurozone finance ministers are meeting today, in what looks to be the most chilled get-together of this group in recent time. They’re set to sign off on an agreement that will see the combination of the eurozone’s temporary and permanent bailout funds, the EFSF and ESM. On paper, the funds have the potential to produce a combined firewall of €940bn. Still far too little if Italy and Spain went, but an impressive sum nonetheless. That is, on paper. In reality they won’t even come close to this.

In an interview with Bild this morning, German Finance Minister Wolfgang Schauble said he didn’t want to “unnerve markets with numbers”, but in a speech in Copenhagen he did just that, saying,

"We have 500 billion euros in fresh money available, together with the programs already agreed for Ireland, Portugal and the new program for Greece. It is about 800 billion (euros). I think it's enough."

Apparently, Schauble reached this number by adding €500bn from the ESM, €200bn from the EFSF, €56bn in bilateral loans to Greece and €60 billion from the third bailout fund, the European Financial Stability Mechanism (EFSM) – which is underwritten by all 27 member states via the EU budget. But much of this cash has already been spent, i.e. the EFSM only has €11bn left, and some of the other money can’t actually be lent out. In addition, the remaining €240bn in unused EFSF capacity will be held back for ‘exceptional circumstances’ until mid-2013.

As we’ve been reminded of time and again, the only thing that matters is effective lending capacity. The real amount of cash that is still available to back stop struggling states, should it come to that, is only around €500bn. Here’s the lending capacity math (courtesy of some excellent analysis by the WSJ):

  • Mid-2012 – The ESM will be limited to €210bn (as it will only have €32bn in paid-in capital). Along with the €240bn in ‘exceptional’ funds, this gives a total potential lending of €450bn. (The money which is already out the door should be ignored)
  • Mid-2013 – Following a second instalment of capital the ESM will be able to lend €420bn. The ‘exceptional’ funds will be wound down around this point.
  • Mid-2014 – All ESM capital paid-in, reaches total lending capacity of €500bn.

(There is one caveat to these figures, in that the eurozone could decide to speed up the paying in of ESM capital if the funds were needed. However, this would likely face significant opposition from the likes of Germany and Finland, and is therefore most certainly a last resort).

So despite Schauble’s comment, euro finance ministers continue to throw various different numbers around, which bear few resemblances to reality. We also note that the French Finance Minister, François Baroin, yesterday floated an unfortunate analogy. He said,

"The bailout fund is a bit like the nuclear weapon in the military domain…It is not intended to be used but to act as a deterrent."

The problem here is that if it’s too big and terrible to ever be used, it’s likely that it won’t ever be used. Even jittery markets will be able to figure out that a large fund which would damage French and German credit ratings if ever extended will never be fully tapped. So clearly some circular logic at play. And let's not forget that it’s still far too small to save Italy and Spain should if worse come to worse.

But at least eurozone ministers can look forward to a quieter Friday than usual...

 

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Fri, 03/30/2012 - 07:51 | 2302989 GetZeeGold
GetZeeGold's picture

 

 

Expansion to infinity......and beyond!!!

 

Fri, 03/30/2012 - 07:56 | 2302997 maxmad
maxmad's picture

diminshing returns~!  bitchez!

Fri, 03/30/2012 - 07:59 | 2303003 GetZeeGold
GetZeeGold's picture

 

 

Send in the army of Dutch girls to plugs the holes.

 

Fri, 03/30/2012 - 08:14 | 2303023 withnmeans
withnmeans's picture

It now begins: It is quite unusual how the U.S. has turned a blind eye to this "or maybe they just don't give a damn", however the BRICS are going to do trade WITHOUT the use of the U.S. dollar.

The BRICS held a conference yesterday to set up trade without the use of the dollar in order to start using currency that has some value, further more not having to put up with the arrogance of the western countries.

So, to put this plainly, we are screwed, dollar will no longer be the world currency and it will massively devalue.

Fri, 03/30/2012 - 08:28 | 2303060 AnAnonymous
AnAnonymous's picture

The USD has value. Probably the currency to collect the most value to wealth in human history( helped by being coincidental to the abundance times)

BRICs setting their own currency business is no go. Wont work.

BRICs taking with them other commodity rich countries, that would be the issue.

Funnily enough, that could be achieved through diplomacy and trade agreements.

So expect more US citizen military activity in related zones. US citizens wont let the third world commodity rich countries go away, they are the base of the US world pyramidal order.

Fri, 03/30/2012 - 11:53 | 2303669 boogerbently
boogerbently's picture

Paper promises for paper debts.....

seems fair to me!

Fri, 04/13/2012 - 13:11 | 2342127 MeelionDollerBogus
MeelionDollerBogus's picture

The US citizen is already too tapped out to fund more military empire - civil war will break out before you get a war into South America for "democracy" or "counter-terrorism". Treasure & Blood are too low. Sure, if they were not, expect the same from US citizenism. But... tapped out ... something else happens.

Fri, 03/30/2012 - 08:33 | 2303081 i-dog
i-dog's picture

 

"BRICS held a conference yesterday to set up trade without the use of the dollar"

It sounds like they are in desperate need of some "democracy" in Brazil and India.

"Captain! Turn the Enterprise around. Destination: Brazil".

Fri, 03/30/2012 - 09:30 | 2303243 DeadFred
DeadFred's picture

Marines wading ashore at Ipanema? Would they make it past the first line of sunbathers? Their fierce resolve would be put to the test.

Fri, 03/30/2012 - 10:41 | 2303446 Zero Govt
Zero Govt's picture

cherry bums in g-strings ...it's the WMD of genetic code

Fri, 04/13/2012 - 13:07 | 2342112 MeelionDollerBogus
MeelionDollerBogus's picture

India has nukes. That's all America needs to know to stop delivering "democracy"

Fri, 03/30/2012 - 08:28 | 2303018 TruthInSunshine
TruthInSunshine's picture

- Whatever can't last won't -

 

The more the bulls here this without immediate repercussions, the less concerned they become.

The more the bears hear this without immediate repercussions, the less concerned they become.

The more the  convictionless hear this without immediate repercussions, the less concerned they become.

The intersection whereby bulls, bears and the convictionless are less worried about immediate repercussions meet equals the epitome of complacency.

And the epitome of complacency, not tops or bottoms in 'sentiment,' is actually what precedes multi standard deviation events in financial, credit/debt, equity and sovereign markets.

-And by the way, one can now mathematically put a precise minimum amount of debt that has to be repaid by the U.S., within at most, 5 years. It's 5.9 trillion that has to be paid back within 5 years at most (this is a best case scenario): Four Numbers Add Up to an American Debt Disaster -

As we all watch the central banks provide electronic liquidity of 8 trillion+ USD, which has been used to artificially prop up asset and commodity prices, thus creating a consumption tax of epic proportions on an already deleveraging private sector and individual consumer, the point at which demand destruction not only creates real GDP contraction - but actual nominal GDP contraction - draws closer, even in the 'safest' economies.

All that Bernanke and his cohort central bankers have done is blow yet another bubble to hide the underlying rot that taking place at a fast pace and deep level in the fundamental economy.

Just like the last housing/commercial/office real estate bubble papered over the loss of 8 million long term manufacturing jobs (i.e. structural unemployment) by providing temporary jobs and incomes/gains to millions of realtors, contractors, carpenters, mortgage brokers, title insurers, furniture stores, appliance stores (including Sears, Best Buy, Home Depot), and anyone else who found temporary refuge and income in that bubble, we now have a new bubble in equities and bonds - simultaneously - of all places, where the papering over yields far less 'coverage' in terms of a showering of economic benefit, and this, too, won't last, because...

...the very digital fiat loaned at zero or near zero amounts, flooding into the world's coffers, is precisely the reason deleveraging in the real economy is occurring, and leading to demand destruction in all but a select few, inflexible goods (such as oil - and even here, there's an argument that can be intelligently made that higher oil prices simply enhances and accelerates the demand destruction in other goods/services; e.g. that $5 gas will hurt Best Buy even moreso, as that's more money that must be used to buy energy, and less available to buy Best Buy's wares)...

- Whatever can't last, won't -

Fri, 03/30/2012 - 08:35 | 2303078 JohnKozac
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TIS, you are correct. The entire market was distorted by the flood of money to the RE industry. I know two good elementary school teachers who quit to sell houses for a builder...suddenly they were buying BMWs and lots of expensive toys....selling as many houses as possible to people they knew could not afford them....zero money down...no documentation of job...no assets....yet they sold them like hot cakes.

Now that the people looking for houses has slowed to near zero, they were both fired......trying to go back teach 2nd and 7th grades.....

Fri, 03/30/2012 - 09:44 | 2303249 Element
Element's picture

When you don't have to invest in a profitable real-economic going-concern in order to make real gains over inflation, then often you won't.

Especially if the risk-reward seems better if you just skim cents off real investors in such going-concerns and then short them to oblivion at every opportunity.

What REAL business would want such alleged 'investors'?

So there is no practical productive investment mechanism in stock markets any more.

This implies economic collapse is baked into such a corrupt financialisation as a parasitic pseudo-'investment' within every sector of 'advanced' economies.

Which are really thus retarded economies.

Mines take 30 years to pay back start-up and operation investment.  And people don't give a fuck about that, because they don't understand that it has to happen. The real investor's money has to be there for this process to continue to occur.  As everything we own and use in every waking moment is the result of exactly that sort of prior long-term investment and investor commitment to it.

Instead, the copious money stream from superannuation is being destroyed, skimmed endlessly, or even outright stolen, by parasitic financialists, and their bonus system rewards their thefts, which are the opposite of making a real economic investment and return as a reward.

The wrong people are getting rewarded instead of horse-whipped and hung.

So mis-allocation into non-investments is the 'investing' norm.

Hence we get this breed of smart and savvy ones who talk of 'investments' and 'trading' all day, and have probably never made a single real-investment in their entire life.

Then wonder why the market is completely porked and the real investor has fled, and only the involuntary and mandatory investors remain, thanks to complicit govt policy.

Then a stock index propped only by POMOs!

And we should just believe in Bernanke's rescue-helicopter?

WTF?

Lambs to the slaughter.

Fri, 03/30/2012 - 11:57 | 2303680 boogerbently
boogerbently's picture

Does that include the $3+T budget that is being proposed right now, that will be voted down as being too "austere"?

Is that just "foreign" debt? Not "native" debt, like the $3.5T the Treasury owes Social Security?

Fri, 03/30/2012 - 07:59 | 2302991 Ghordius
Ghordius's picture

the German position is that the firewall increases have to be gradual - and the banks are asking for a "solution" in form of a "bigger bazooka". Sounds familiar, eh?

if someone would have told me twenty years ago that Schäuble would be that good in the 21st I would have laughed...

he was quite good, though he definitely has improved since the failed assassination

Fri, 03/30/2012 - 11:47 | 2303608 mraptor
mraptor's picture

That sound to me as better approach, compared to the unchalenged printing of the Fed.

Many people think because Europe is hodge podge of countries makes it bad , because they can't get to a desicion so fast..

I think in a perverted way this could be a good thing in the long term. Because it can cause inaction on the part of the ECB and euro-banks i.e. less printing... and force them to solve at least some of the problems early.

This also implies that the fall will first happen in Europe or may be Japan (not in USA), but at the end the Euro will be much stronger than the $ (if it survives of course. I think it will, but...)

Also additional devaluation of the dollar can come from outside, holdings of $ is by much largest in any CB portfolio (65% afaik) and as we are seeing little by little countries are switching to direct swaps and local currencies in may places. I think this trend will continue as the times pass..

As the traders say - "The trend is your friend"

Fri, 03/30/2012 - 16:11 | 2304683 TruthInSunshine
TruthInSunshine's picture

Germany is playing their poker hand well, and I sure as hell don't blame them.

They're not going to let the deadbeats win, and they're not going to let the banks win (much to the chagrin of David Cameron and the sucking, toxic chest wound of a cesspool that is London., with its Financial-centric economy that taxes the rest of the UK - much like New York is and does to the rest of the U.S.).

Fri, 03/30/2012 - 08:02 | 2303006 disabledvet
disabledvet's picture

agree with the math...but now you're arguing against the reality of austerity. entire economy's in Europe are now being "destituted." Ireland "writ large." One can argue against the...inhumanity of it all. In the past this would be "causi bellum." For those whose economy have been collapsed however i detect nary a peep. I still fail to see...as with our own variant here in the USA...how any of this is ULTIMATELY good for banking. We are sowing more than just seeds of mistrust here. These are multi-generational hatreds being created. "Bad for business" as they say...

Fri, 03/30/2012 - 08:30 | 2303068 AnAnonymous
AnAnonymous's picture

We are sowing more than just seeds of mistrust here. These are multi-generational hatreds being created. "Bad for business" as they say...

_______________________________________________

Indeed. But US citizens have monetized every kind of conflicts that could think of.

Why shall they avoid those ones?

Good for business. US citizen business...

Fri, 03/30/2012 - 08:31 | 2303071 TruthInSunshine
TruthInSunshine's picture

The giant sucking sound heard and growing louder is the bank tax.

It's not a tax on banks, but a tax on consumption to prop up the banks.

It's done by devaluing purchasing power of fiat, which leads to demand destruction in the real economy, which still comprises the lion's share of economic activity.

Not only are central bankers now in a massive liquidity trap, with each attempt at printing themselves out of such trap, they drown yet more consumption.

Fri, 03/30/2012 - 08:05 | 2303008 Peter Pan
Peter Pan's picture

Can someone tell me the source of even the 500 million euros? Was it real cash, a guarantee or did someone print while I was not watching?

This is not a rhetorical question !!

Fri, 03/30/2012 - 08:14 | 2303025 ThatThatcher
ThatThatcher's picture

A mixture, partial paid-in capital and the rest a promise by countries (incl. Italy/ Spain) to pay in when it is needed.... Like a Scouts' honour promise, rather like 'I will keep my fiscal deficit below 3%....except for this year....and the next' Ahem Spain

Fri, 03/30/2012 - 08:14 | 2303026 ThatThatcher
ThatThatcher's picture

A mixture, partial paid-in capital and the rest a promise by countries (incl. Italy/ Spain) to pay in when it is needed.... Like a Scouts' honour promise, rather like 'I will keep my fiscal deficit below 3%....except for this year....and the next' Ahem Spain

Fri, 03/30/2012 - 08:32 | 2303073 AnAnonymous
AnAnonymous's picture

billion, billion. The situation is not that dire to consider about millions.

Fri, 03/30/2012 - 08:33 | 2303079 GetZeeGold
GetZeeGold's picture

 

 

This is not a rhetorical question !!

 

Well.......it seems a little rhetorical. Where do you think it came from?

 

Fri, 03/30/2012 - 08:39 | 2303090 i-dog
i-dog's picture

Well ... there are a lot of sofas and a lot of cushions in the European parliaments that they apparently rummaged around in?

Fri, 03/30/2012 - 08:50 | 2303113 Colonial Intent
Colonial Intent's picture

Hey, those sofa's aren't as comfy as they look.

I got backstage at the EU parliment and the EU court of human rights a few years back

The parliment is mostly hopium based wannabe statesmen (and women).

The EU court of human rights has less beer-ocracy and more real action but it's still got a long way to go.

Fri, 03/30/2012 - 08:42 | 2303096 Schmuck Raker
Schmuck Raker's picture

Here you go:

http://en.wikipedia.org/wiki/European_Stability_Mechanism

 

The first graphic shows each EZ country's liability.

NOTE the amounts DEPOSITED so far(second to last column).

Fri, 03/30/2012 - 09:06 | 2303163 GMadScientist
GMadScientist's picture

And yet equities wait, mouths agape, like so many baby birds....waiting for their golden shower.

 

Fri, 03/30/2012 - 09:05 | 2303159 Schmuck Raker
Schmuck Raker's picture

All kidding aside here's P Tchir's brief on why the ESM isn't materially different from EFSF:

http://www.zerohedge.com/news/esm-efsf-or-eb-will-any-it-work

And here is the full rundown(Dec '11 rev/latest?) on EFSF numbers & mechanics:

http://www.zerohedge.com/news/revised-efsf-draft-shows-italy-spain-respo...

Fri, 03/30/2012 - 08:07 | 2303012 francis_sawyer
francis_sawyer's picture

Brave Sir Robin!

"When danger reared it's ugly head, he bravely turned his tail & fled"

http://www.youtube.com/watch?v=jYFefppqEtE

Fri, 03/30/2012 - 08:08 | 2303013 orca
orca's picture

Same with FGBL (Bund, the 10-y German treasury), moves inversely in tandem with EUR/USD.

Fri, 03/30/2012 - 08:12 | 2303017 Boilermaker
Boilermaker's picture

Once the decision has been made that the currency will be scuttled, what difference does it make?  They are already past the point of no return anyway.  Why is this surprising?

Fri, 03/30/2012 - 08:14 | 2303019 Son of Loki
Son of Loki's picture

The flood of money is being printed and expanding CBs balance sheets.....hgowever, the bankers seem happy for the $500 Billion. Why not? It's free money to them and means a sweet bonus for Bnak esecs for H1.

Fri, 03/30/2012 - 08:15 | 2303031 JaylP6
JaylP6's picture

Stock market bottom April 2012 - http://stockmarketbottom.com

Fri, 03/30/2012 - 08:21 | 2303047 debtor of last ...
debtor of last resort's picture

ESM

European Sado Masochism

Fri, 03/30/2012 - 08:40 | 2303094 Sandmann
Sandmann's picture

This is Theatre of The Absurd....the Banks are beyond redemption. As Simon Johnson writes in today's FT Deutschland

http://www.ftd.de/finanzen/maerkte/:top-oekonomen-europa-im-wuergegriff-...

 

Time to let them go and ignore their Lobbyists......they want a National Socialist State with themselves acting through The State but they are more likely to face utter extinction

Fri, 03/30/2012 - 08:54 | 2303125 timbo_em
timbo_em's picture

LOL...and the PIIGS' share in saving the PIIGS is 36.7 percent of that already highly doubtful 800bn.

Can't wait to see tomorrow's MSM headlines. I assume our heroes 'made great progress' and 'sent a strong signal to the markets'.

Fri, 03/30/2012 - 08:57 | 2303129 Element
Element's picture

 

 

"The bailout fund is a bit like the nuclear weapon in the military domain…It is not intended to be used but to act as a deterrent."

 

A 'deterrent' ... to cascading sovereign default?

So ... let's get this straight, the 'deterrent' is going to cover bank's loses when a country can't refinance at any viable rate, and there are riots in the street?

This is the ... 'deterrent' to a default?

 

Riiiiiiiiiiggghhhht!

 

ROFL! 

Fri, 03/30/2012 - 09:05 | 2303158 GMadScientist
GMadScientist's picture

The tiny parasol is not to stop the avalanche, it's to provide the false sense of security that you'll be safe when one happens.

Fri, 03/30/2012 - 09:02 | 2303152 GMadScientist
GMadScientist's picture

"...It is about 800 billion (euros). I think it's enough." (famous last words)

You're about to bring a knife to a gun fight, Herr Schauble.

Fri, 03/30/2012 - 09:14 | 2303187 Herman Van Rompuy
Herman Van Rompuy's picture

No need for all this negativity, with this "solution" I and my colleagues have brought peace and stability to my EU empire.

Stop inciting panic and anguish amongst my herd with these blatant lies and make sure to declare your pm holdings regularly to an EU-representative near you.

 

/With love from Herman Van Rompuy, Emperor of Europe

Fri, 03/30/2012 - 09:50 | 2303299 Element
Element's picture

Hermi baby, you're the sort of worm that'd look good on a hook.

Fri, 03/30/2012 - 10:49 | 2303474 Zero Govt
Zero Govt's picture

they're all hooked, they just don't know it yet

Fri, 03/30/2012 - 11:10 | 2303556 Herman Van Rompuy
Herman Van Rompuy's picture

I´m an unelected bureaucratic emperor who always will go away unscathed from any mess created by "unfortunate circumstances".

 

/Peace & love, Herman Van Rompuy, soon to be world emperor.

Fri, 03/30/2012 - 09:21 | 2303210 slewie the pi-rat
slewie the pi-rat's picture

is that a fat finger on soybeans?

^ 5%:  $14.25?  wow!

Fri, 03/30/2012 - 09:42 | 2303277 nah
nah's picture

thems real dollars

Tue, 06/26/2012 - 15:40 | 2562613 SteinRobyn17
SteinRobyn17's picture

Invested Tax payers money in bailout. Cool math games

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