Guest Post: The Euro Fiasco Suicide Formula (EFSF)

Tyler Durden's picture

Submitted by Alex Gloy of Lighthouse Investment Management

The Euro Fiasco Suicide Formula (EFSF)

There is one simple rule for investors: avoid all things beginning with “Euro-”. Eurotunnel ended in bankruptcy. Eurodisney was a disaster for public shareholders. And so the Euro itself is following the same path.

“Euro” birds

European politicians are faced with one problem: none of their plans to end Europe’s debt crisis has worked. Absolutely nothing. Which is not that surprising – since when does adding debt solve a debt problem?

Fishing in Lake Acronym yielded only meager catches like SGP (“Stability and Growth Programme”, a paradox), SMP (“Securities Market Programme”, which has less to do with market than with manipulation), and, finally, the bazooka: the EFSF (European Financial Stability Facility).

“Stability” sounds good, and “Facility” leaves the uninitiated in the dark as to whether this is another debt pyramid and who will ultimately foot the bill.

The idea behind the EFSF must be so good the agency wants to keep it to itself and prefers not to shed light on the mechanism behind it. Based on leaked drafts and comments in the press it could look like this:


  1. Since Germany successfully repelled French demands for an EFSF banking license creative minds found ways of leveraging the (non-existent) funds.
  2. The original EFSF capacity was EUR 440bn; 150bn already went to Greece, Ireland and Portugal. After 40bn inexplicably vanished, 250bn are left.
  3. EUR 250bn is nothing compared to the funding requirements of Italy and Spain; hence it needs to be “leveraged”.
  4. The EFSF would invest those 250bn in the “equity” (or high risk) tranche of a “Special Purpose Vehicle”. Governments, the IMF and Sovereign Wealth Funds (SWF) are supposed to gobble up the 500bn “mezzanine” (or medium risk) tranche. Together with a 250bn “low risk” tranche the SPV would have EUR 1 trillion in firepower.
  5. This firepower is then used for purchasing “PIIGS” government bonds in primary and secondary markets. Some small change (EUR 106bn) would even be left over to recapitalize the entire European banking system.
  6. To entice investors formerly burnt in PIIGS bonds to repeat their mistake, the SPV would issue “partial protection certificates” (PPC). Those PPC’s are in fact credit default swaps, but since politicians have blamed the latter for the consequences of their own actions they had to come up with a different name.
  7. Credit default swaps (unless the gods at ISDA decide otherwise) at least pay out the difference between par (100%) and the recovery value. PPC’s would cover only a limited amount (20%, for example). Because, you know, a sovereign default wouldn’t be that bad. Greece, of course, is unique and an exception. Right; so unique that RBS wrote down its Greek holdings to 37 cents on the Euro.
  8. For the “unlikely” event of a default (a 1 in 3 chance for Italy and Spain over the next five years according to implied default probabilities) the PPC will pay out a small token (in appreciation of your stupidity) of consolation. Not in cash, however, but in EFSF bonds. This is usually referred to as “captive insurance”. It is akin to the agent selling life insurance policies on the already listing Titanic.
  9. Not only is the insurance circular, but so are the guarantees. Keep in mind that all the EFSF has raised to far is EUR 14bn (and that money is already spoken for). Initial “guarantees” of EUr 780bn have melted down to 726bn as Greece, Ireland and Portugal have “stepped out” (they can’t participate in their own rescue). In case of “step-outs”, the maximum guarantee is reduced and remaining countries have their share of guarantees increased. It’s a game of inverse musical chairs where the last one standing loses, not wins.
  10. The only AAA-rated countries left are Germany, France, the Netherlands, Austria, Finland and Luxembourg. The last three do not matter due to size. With the German-French 10-year government bond spread at 1.5% the market believes France is about to lose its AAA. That leaves Germany and the Netherlands, or 33% of the original guarantors. In case Italy and Spain need money, 30% of the guarantors would “step out”, at which point the self-insurance scheme collapses:
  11. Condolences go out to the poor souls who bought the first three issues of EFSF debt at minuscule spreads to swap rates. Official lenders like the IMF (and, until the “comprehensive plan to save the Euro-zone”, the EFSF) are not supposed to take haircuts as this could cause abdominal pains with innocent taxpayers in other regions of the world. Hence the “AAA” rating for the EFSF. But during the night of October 26/27, the beautiful EFSF butterfly went into reverse metamorphosis and emerged as an ugly larvae. “Last loss” became “first loss” participation. The risk profile had been changed by the stroke of genius. And it showed in the yield spreads to German government bonds:
  12. It therefore does not come as a surprise the EFSF had to first scale down, then postpone, then buy part of their own bonds during the recently failed auction. According to an investor presentation in August, the plan was to have 7 bond issues by the end of 2011 (3 for Ireland, 4 for Portugal). It looks like the recent (4th) might have been the final one.
  13. In a desperate move, Klaus Regling (CEO of EFSF) announced plans to raise money via short-term bills with maturities of less than a year instead. Lend long, borrow short – even bankers understand this is a recipe for disaster.
  14. There was an odd statement by Chancellor Merkel at the recent G20 meeting in Cannes: “Hardly any countries in the G20 have said to participate in the EFSF”. This struck me as odd, since it was the truth, and politicians are not known to tell the truth. Did Merkel suffer from the effects of an extended stay at the bar with Putin? Unlikely. This just does not fit the usual “we will do everything to save the Euro”-line. She could have said something like “I am convinced the EFSF bond issue will be fully subscribed; the demand is so high we decided keep the books open for a little bit longer”. But no, she chose to tell the truth. Maybe it had dawned on her that the EFSF was actually a formula for mass (financial) suicide and that Germany would be the one footing the bill in the end? The only way to “escape” being burdened with other countries’ debt is to “step out” of the circle of guarantors. This could actually hasten the financial crisis.
CONCLUSION: Italy and Spain are too big to be saved by Germany and the Netherlands. Merkel's statement reveals a sudden "buyer's remores" by Germany. The EFSF is dead before any org-chart has seen the light of day. All what is left to do for Germany is to play on time and to prepare for the exit from the Euro.

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achmachat's picture

no wonder the piigs are angry! they're covered in euro poop.

donsluck's picture

It is well known that the Euro is the preferred currency of the illegal drug marketers, due to the high value of it's 400 Euro note. Here's an idea, the Euro zone legalizes opiates, based upon the alcohol model, and becomes the de-facto opiate currency, much like the US dollar/oil structure. Similar to the world's addiction to oil, the Euro/opiate relationship slowly, over time, becomes more and more entrenched, rescuing the entire zone!

Am I brilliant or what?

Hobbleknee's picture

Why would they switch currencies when the US military already protects opium production in Afghanistan, provides safe import and has legalized money laundering as long as the deposits come from abroad?

DaBernank's picture

That would be the 500 Euro note...

sampo's picture

The Euro Fiasco Suicide Formula (EFSF)

Designed by JPM. Nice way to stick save the dollar?

Pretorian's picture

I bet the farm that eur /usd will move 100 pips north. Thats why Morgan Stanley in beggining had 15 empoyess now they are over 50 000.

DaBernank's picture

Once Greece officially defaults, a surge in EUR/USD

TheMerryPrankster's picture

why do they call them greek sandwhiches euros?

Desert Irish's picture

Go long popcorn....

Landrew's picture

This convoluted mess looks familiar to me? From equity to housing, all bubbles.

anonnn's picture

But ask yourself, "Who are the real winners of the apparent fiasco?"

Mark123's picture

The real wealth in Europe owns land, corporations and gold.  They could give a rats ass about the Euro, except to ensure they can profit from its demise.


I'll bet they are also focused on confiscating China's new-found wealth.  Don't want those pesky orientals getting too cocky.

LawsofPhysics's picture

Yes, and China is going for it.  China is the new blonde at the mall and she is on a shopping spree.

BigJim's picture

Ultimately, it'll be the French and German taxpayers who will be bailing out their banks when the PIIGS default... so shouldn't the bird pyramid be inverted? And why is the UK in there at all?

TJ00's picture

Well the EIB seem to be buying ESFS bonds and the EIB is funded by all 27 EU countries not just the Eurozone that includes Britain, SAS to storm them in 3... 2...

ncdirtdigger's picture

Because they are waist deep in Irish bonds.

TheMerryPrankster's picture

For a minut I thought you typed waist deep in Irish Blondes,

domains-are-hard-assets's picture

Time is running out for moving into assets that can sustain the next phase of the downturn/collapse. Look for assets that have:

- No counterparty risk: You must own the asset -- not via a synthetic or proxy
- Low carrying costs
- Transferable and/or instantly assignable in the event of sale
- Can be securely and anonymously held but with 24/7 direct access to the asset

I was blown away to learn this week that even Celente got whacked by the MF Global BK.   Like most people, Celente had no idea that Lind-Waldock was clearing through MF. Unbelievable.  

PMs, Weapons, non-perishable barter goods are well known. Personally, I like intangible assets (patents, trademarks, domain names).  

equity_momo's picture

Patents? Tms's , domains? What makes you think the rule of law will extend to those when the rule of law is clearly raping every other part of the paper ponzi? You would be as delusional as B9K9 in thinking investing in certain paper (which patents are) will save you during this phase shift UNLESS you are in "the club"
Stock certs? Bonds? Frns? Patents? ALL paper will burn .

Its distressing to read so many ZH posters understand 99% of whats going on and what is going to happen and then their cognitive disonance kicks in and they think they can outsmart the paper illusion - as a serf you will NEVER outsmart the paper game through paper. You said it yourself , even celente got burnt. Youre quite right with the other suggestions. The only other survival tool is to run a business or own a skill that is necessary. Not the desk jockeying most rely on.

domains-are-hard-assets's picture

@Equity - What makes you think that the TPTB don't value the rule of law?  It sounds like you are anticipating a fascist outcome where the gains are privatized and the losses are socialized.  Well, in a fascist scenario it is private enterprise that ends up owning everything. TPTB don't need to steal property. They can simply buy it. ZIRP is a license to do exactly that.  

Specific to domains, it is worth noting that a consortium comprised of KKR, TCV and Silverlake Partners just bought a controlling stake in registrar behemoth GoDaddy in a deal that value GoDaddy at $2.5 billion.  Domains are the raw land of the Internet.  The internet economy is growing a lot faster than the offline economy. Domains are an ownable bet on the future growth of the Internet.

Specific to patents, Intellectual Ventures (among others) have been methodically buying up patents.  There are a number of companies that are copying this model in the patent arena, as well as smaller ones that are rolling up TMs.  

It may be fashionable in certain circles to envision Max Max scenario where the rule of law goes out the window.  However, I think the odds of that coming to pass are slim to none though I am sure there will be pockets of chaos, urban blight and failed democracies.  Yes, I agree that paper backed by nothing will burn.  However, intellectual property is paper that is backed by an asset!!!! That's the point.

I humbly suggest to not underestimate the power of infinite fiat to be used to acquire strategically useful assets. Intangible assets can be strategically useful assets particular when aggregated.  Anyone who does not see the writing on the wall is not paying attention.

TheMerryPrankster's picture

GoDaddy is not the only Domain Registrar.

Investing in the internet by investing in Godaddy is like investing in Sears by buying a parking space at the mall.

doggings's picture

I like mine better, Everso Feckin' Stupid Feckers

oogs66's picture

and yet markets keep going higher...

DutchR's picture

Glad we voted NO

O wait....


Atomizer's picture

European History Timeline 




1707 - Act of Union, Scotland and England become one country. Death of Aurangzeb leads to the disintegration of the Mughal Empire


Finance and Financiers in European history

RoiBoi's picture

"To entice investors formerly burnt in PIIGS bonds to repeat their mistake, the SPV would issue “partial protection certificates” (PPC). Those PPC’s are in fact credit default swaps, but since politicians have blamed the latter for the consequences of their own actions they had to come up with a different name."


I had not laughed yet this morning.  I slowly realized how funny that last sentence was and went back and read it with a John Cleese accent combined with a Bill Hicks angry deadpan stare…

I laughed my ass off.  Thank you.

What continues to amaze me is how much all of this puts me in a mood reminiscent of when I am viewing Dr. Strangelove.

That completely campy and accurately absurd parody of our collective reality

We already know the ending…..get it ready WilliamBanzai7…..BenniBoi reprising Slim Pickens….

TheMerryPrankster's picture

Except instead of the bernank riding to the ground straddling an atomic bomb and waving a cowboy hat, he'll be in a helicopter filled with water,and you can see the goldfish swimming by his face as the helicopter windmills to the ground with bent primary rotors and a skid full of Fedreserve notes burning in flames attached to the landing runners on the bottom of the helicopter.

Underwater ben they called him after that. 

Somebody call China we need 10,000 Ben Bernanke Jack in the Boxes, when he pops out he's clutching cash and wearing a button that sez "Ask me 4 a  0% Loan!!" Choice of clown suit or bankers suit, and  music is either "hold that tiger' or "light my fire" (this one even smells like burning currency)

Maybe the remake should be entitled "Chairman Strangelove" or How I learned to love the Federal Reserve.


Element's picture

Have no fear, I hear Ben can catch an SA-16 Igla MANPAD with his butt crack ... ... and then can return fire!

He'll not go down so easy, ... this is his finest hour ... yeehaw!

Atomizer's picture
1999 Euro Coin Sets

Belgium, Finland, France, Netherlands and Spain are all issuing official Euro mint coin sets dated 1999. We have full information about these sets on the individual page for each country:-

Availability & Prices:

Description Available* Price £ Price $ Price € Belgium 1999 Sold Out £17.50 $26.50 €28.50 Finland 1999 Sold Out £24.95 $37.50 €41.75 France 1999 Sold Out £17.95 $26.95 €29.95 Netherlands 1999 Now £17.95 $26.95 €29.95 Spain 1999 Now £14.95 $22.50 €24.50


Availability* = Dates shown in this column are the most recent release dates advised to us by the mints or their distributors. If the date shown pre-dates the current date, this does not mean the item is in stock. Where items are in stock they are clearly marked as "In Stock", "Now" or both.

TBA = To Be Announced. To reserve future issues, please see our Euro Set Reservations page

TheMerryPrankster's picture

I left a set of these in my car on the dashboard, while I ran into the IRS office to grab some forms and when i came back out somebody had broken into my car and left 5 more sets on my dash.

How do i get rid of these damn things, the garbage man keeps throwing them back into my driveway.

anonnn's picture

A  fiasco for the rich and powerful movers and shakers? Like losing a lollipop?

slewie the pi-rat's picture

play on time?

can we get a wagnerian break, here?

Ted K's picture

How about the Eurozone situation is always the same, Every Fucking Stupid Fucking time????

anonnn's picture

Charles Dickens in Little Dorrit: A person who can't pay, guarantees that another person who can't pay, can pay. ...

JPM Hater001's picture

This is extremely hopeful for Europe.  And by that I mean...the amount of hope they are investing in the solution is only seconded by it's stupidity.

Crash on!

CoyoteBlue's picture

So, I shouldn't apply for a job with the EFSF? I would have been a crackerjack salesman. 

Snakeeyes's picture

We have our own suicide formula is the US. Endless spending programs and debt with no end to sight. Even Martin Feldstein of Harvard, usually a reasonable chap, now wants taxpayers to couch up $350 billion for underwater households. Or maybe Marty Feldman wrote the NY Times article!

Feldstein Plan for Stopping the Drop in Home Values: Write Down Average of $31,818 Principal Per Underwater Home – Cost to Taxpayers $350 Billion With Questionable Outcomes


sgt_doom's picture

Snakeeyes sounds more like she/he/it is suffering from SNAKE BITE!!

"Even Martin Feldstein of Harvard, usually a reasonable chap..."

Oh, you must be referring to that "legendary"** Marty Feldstein, the clown who was a director at HCA during their colossal medicare/medicaid fraud, leading to the largest out-of-court settlement to the US government in damages?

And the very same Martin Feldstein, of legend, who was a director at Eli Lilly when they were given the largest criminal penalty in US history for illegal marketing of a damaging drug?

And the one and only Martin Feldstein of Harvard, who was a director at AIG's Financial Products group during the largest insurance swindle in US history (selling $460 billion of CDSes, with no capital on hand to back them up)???

What's that you say?  Martin Feldstein reasonable?  Or simply that he wants to resuscitate  the housing bubble for the Wall Streeters, his paymasters?

lotsoffun's picture

that would be fun - but i won't go there.  sounds like this guy marty feldstein gets around.  i hope he's rich!


time123's picture


Nice post. I enjoyed reading it.


In my opinion, all the recent negativity in the press regarding the European debt crisis has created a tremendous buying opportunity for US stocks. 


The Invetrics system just gave a long term "Buy" signal as of the close of 11/11/11 with a new DJIA target of 13,500! You heard it here first.




time123's picture

Sorry, that was a typo. I meant to say 15,500 which is about 27.6% higher!



time123's picture

Looks like we are moving higher today! The Invetrics long term Buy signal of 11/11/11 will likely get confirmed!


Börjesson's picture

Interesting how Germany features on both the first and the third rung of the bird ladder. The lower bird presumably represents the German people, while the smug one on top is the German elite...

Phil Free's picture

Good eye .. I didn't see DE on the 3rd rung also ..