Here Is What Goldman Thinks Europe Should Do To Save Italy And Spain (Hint - More Bond Buying This Time On The Books)

Tyler Durden's picture

When it comes to its opinion on the shape of the bailout, Goldman is a force to be reckoned with (as in every other endeavor, no matter how self-serving the outcome ultimately is): after all it was Goldman which first proposed expanding the EFSF and using it as a "bad bank" SPV which has the extra benefit of being off the balance sheet, and can issue more debt than virtually any financial institution in the world (see EFSF - Too Small? Too Big? Or Just Wrong?). Which is why when Goldman discusses next steps, you can be positive, this is precisely what will end up happening, and that Goldman is already well positioned to profit from whatever policy recommendations it has imposed. So without further ado, here is Dirk Schumacher's latest outlook on how to perpetuate the European status quo.

European Views: Markets focusing on Italy and Spain: What are the options for policymakers?


With Italian and Spanish bond spreads widening substantially, market participants are starting to wonder what options remain for Euro-zone policymakers at this stage. The short answer is that a revival of the ECB’s securities markets program (SMP) is the only real option that would prevent a liquidity crisis for Spain and Italy. It is difficult to pinpoint the threshold at which the ECB would revive its SMP program, but we are convinced that the ECB will ultimately prevent any systemic event related to Spain or Italy, with the support of Euro-zone governments.


The following points are worth noting in this regard:


Reformed EFSF not ready yet. It will take a couple of weeks, or even months, before the EFSF can actually make use of its new powers, such as buying sovereign debt in the secondary market. The parliamentary process can be speeded up, but there are limits to how fast this process can be.


EFSF could lend money to governments, enabling them to buy their own debt in the market. What the EFSF could already do now in principle, however, is lend money either to Spain or Italy so that governments could start to buy debt themselves in the secondary market. Under current rules, such a loan from the EFSF would need to be accompanied by a program. However, this process could in principle be expedited, such that this option would become available in a matter of weeks. One drawback of this option is that a buy-back could be interpreted by some as an implicit attempt at a soft debt restructuring.


Even a reformed EFSF has insufficient lending capacity to cover Italy. Parliaments still need to approve the increase in the EFSF’s effective lending capacity to EUR440bn. But, even after that increase, and also taking into account the IMF’s and EFSM’s resources, the lending capacity would still be too small to provide Spain and Italy with a similar program to those for Ireland or Portugal (Italy’s financing needs until the end of 2013 are around EUR676bn). A further increase of the EFSF would be politically very difficult. Moreover, the ratings of the countries providing guarantees could eventually suffer as a result. Finally, one lesson that could be drawn from interventions in FX markets is that the overall amount available to intervene should remain unclear ex ante.


The ECB has unlimited fire power, in principle. Unlike the EFSF or governments, the ECB has no constraints on its ability to purchase sovereign debt. After all, it can create the money needed to buy these bonds at will. The ECB can - and has in the past - sterilise its purchases of sovereign debt, so that the liquidity in the banking sector, and hence the potential inflationary risks, remain contained. Note, however, that the ECB is currently conducting its repos in full allotment mode, implying that it does not control liquidity for banks anyway.


The ECB does not like buying bonds, as it does not want to fund governments – but things are different in a liquidity crisis where there is a risk of systemic events. Central bank independence and credibility are important pre-conditions for a successful monetary policy. Once central banks become too involved in funding governments, independence and credibility may suffer. This does not mean, however, that a central bank should not buy sovereign debt under any circumstances. After all, a central bank also has the function of a lender of last resort. Normally, that role is limited to supporting banks that face a sudden drying-up of liquidity. But in extreme scenarios, such as the current one, this role also refers to governments that face a liquidity crisis.Note in this respect that the EFSF, under the new arrangement, would start secondary market purchases only once the ECB would have declared a ‘state of emergency’ that would threaten the stability of the whole Euro-zone. If such circumstances were indeed to materialise, it would seem only legitimate that the ECB itself could also restart its SMP if the EFSF is not yet fully operational.


This is a liquidity, rather than solvency, crisis for Italy and Spain. We have discussed in the past on several occasions the solvency of Italy and Spain, and we remain of the view that it is feasible for both countries to stabilise their debt and return to a sustainable fiscal path. The concern now is a self-reinforcing run on sovereigns that, in our view, does not reflect any new fundamental information on either of these two countries.


Governments will support the ECB in preventing a liquidity crisis. Any systemic event involving Italy or Spain could potentially have very damaging consequences for the Euro-zone. Governments, and this includes the German government, are unlikely to prevent the ECB from doing what is necessary, not least as governments themselves are limited in their options in the event of a full-blown liquidity crisis. While governments have debated their options intensely in the past in order to support the Euro, there remains an overwhelming consensus among governments that they should not allow the Euro to fail.

Bottom line: Goldman's recommendation is to, surprise, surprise, do more of the same, i.e., monetize, only this time shift from just the EFSF SPV and force direct bank monetization, initially supposedly in the secondary market via the SMP. Naturally, this would impair the Euro, and also send the US stock market much lower due to the surging dollar, but who cares: there are far bigger structural issues that need to be resolved: such as the very violent end of the first leg of the transatlantic Ponzi, even if that means runaway inflation is the end result.

It also means that the next step for the Fed, in response to Swiss, Japanese and European intervention, is guaranteed.

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buzzsaw99's picture

it's a man baby

NewThor's picture



"to help bring jobs back to Americans!"*(satanspeak)

1And he looked up, and saw the rich men casting their gifts into the treasury. - Luke 21


Dick Darlington's picture

This is how the europonzi works in Italy. No wonder they want eurobonds and other fraudulent action to keep the small elite intact. Not sure the german taxpayers will keep paying for these banana republics much longer...

Ghordius's picture

Did you even read the article? Did you even note Tyler's comment? I wonder about your capabilities...

Dick Darlington's picture

Ok, i touched a nerve. I know eurofanatics like you are very sensitive when someone criticises the "deathzone" or it's members. I should have put "OT" in front of my writing so even you would have realised it wasn't a commentary related directly to this post made by Tyler. Keep on dreaming, buddy.

Ghordius's picture

Thank you, so now I'm an "Eurofanatic" just because you post an OT article that says "oh, our politicians were caught with the hands in the cookie jar but look, the Italians are much, much worse!!". I could have told you 30y ago that Italian politicians "costed" three times more then British - rate decreasing.

It is tiring. You seem to think that your press is in any way balanced, your governance nearly perfect and your ways the only worthwile. This specific "Eurofanatic" is just trying to understand if you do this because you know better or not.

"Deathzone"? Because Murdoch says so? Have you seen him keeping your Parliamentary Commission in check? Keep yourself dreaming, "buddy", or come with some sound reason why "Deathzone" which takes some facts like current inflation in account.

Dick Darlington's picture

Just fyi, i'm not from UK but from the "deathzone". So i really don't think this source i linked here is in any way better than any other msm-source no matter which country it's coming from. And yes, it is a "deathzone". It's based on political utopia, not on reality. And the results from this little excercise are for everyone to see. It hasn't worked, it's not working and it'll never work. And a little tip if you may: You don't have to take these things personally. After all, it was just a link to a one little story nothing more nothing less.

Ghordius's picture

political utopia? This is not much of an argument! And I'm not taking it personally, I just want to remind you that the "wogs" read what you write... ;-)

I have a few examples of entities which were deemed "political utopias" well into the first twenty-forty years of their existance:

Category "Classical Nation States": Germany & Italy after their unifications

Category "Non-Classical": The United States of America and The Swiss Confederation

After a while, let's say hundred years nobody notices that they all started as "political utopias".

dervish's picture

Germany is allready coming down. And the taxpayer is not gonna pay for this, since his payments cant even finance the state. the whole system is living of debt and dillusions and like everything that has been build on evil, this also has to come down one day for sure. The earlier the better

not that the german sheeple would wake up. their grandfathers proved that they have the strongest of sleep when it comes to ignorance against "authority"

GeneMarchbanks's picture
1. hightower 2. police academy 3. barack obama 4. coffee shops 5. google voice 6. a day to remember 7. cargill 8. golf courses 9. miranda kerr 10. tcu

There you have it. Top ten. Nobody cares about Europe, Bond auctions, CDS spreads, basically anything somewhat relevant to their lives. So...

Let's hit the golf couse to celebrate the birth of Obama anf then have a latte at the coffee shop.

This is the thought of you average USa persons...


SlipStitchPass's picture

Goldman should be banned from the EuroZone for what they have done, they should not be looked to for advice. It is like asking a theif to set up your security system.


Quintus's picture

To some extent GS has already been banned.  From sovereign debt sales anyway.

Ghordius's picture

The tentacles of the Squid are everywhere. Next step: Mr. Draghi at the ECB.

Hazlitt's echo's picture

All things come back in style- including feudalism. Elites only do this for the common order of things.

AngryGerman's picture

Just take my money...Take it all, please...

oogs66's picture

Goldman will be the first to quote EFSF CDS

Ghordius's picture

So the Squid is saying: "even though your problems could be solved by non-inflationary means, we won't give pause until you PRINT, BITCHEZ! And don't even try to fight us, we are the Squid and we will push the CDS market and all other buttons until you PRINT, PRINT, PRINT!"

Oh Great Vampire Squid, your reign cometh, you bonuses will be made. Long live the Squid.

JOYFUL's picture



This is a liquidity, rather than solvency, crisis for Italy and Spain



Ya, well, we did that already, with the "Black Nobility" et al...banksters run amok, things go up in smoke/




this really IS the END...we into reruns of 14th century Italian bank heists.


The end of our elaborate plans
The end of ev'rything that stands
The end

No safety or surprise
The end
I'll never look into your eyes again

Can you picture what will be
So limitless and free
Desperately in need of
some strangers hand
In a desperate land


ArkansasAngie's picture

TBTF Banksters are really, truly Too Big To Exist.

The problems in housing and commercial real estate is that nobody planned to pay off their debt.  Flip this house ... 10 year no prinicpal notes.  The idea that real estate can only go up is obviously wrong.

The US doesn't intend on paying off its debt either.  Inflation will take care of it. 

QE3 is around the corner.  It will be blamed on the "slow economy".  And ... while the Fedury and Washington and Obama would indeed like the economy to right itself, their real goal is to maintain their own source of liquidity -- treasury sales.

Don't kid yourself ... this is not in your best interests.  It's all about maintaining the status quo.  The Fedury and Banksters are all too happy to launder Washington's ponzi money.



after reading that, I want to RUN from europe

Coldfire's picture

Ponzi clusterfuck. Good thing the European nations with their hands in each others pockets don't have a history written in blood.

Ghordius's picture

Hmmm... How do you invade the Squid Empire? They are transnational. And everywhere where money churns and fees can be made.

Temporalist's picture

Italy 'to default' but Spain may 'just' escape

"Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring, unless it gets dragged down by contagion," Mr McWilliams said.

"Realistically, Italy is bound to default, but Spain may just get away without having to do so," he said."

falak pema's picture

GS works for the Oligarchy. It is the Oligarchy. The Oligarchy has decided it will tell its surrogates to print, and print they will; on both sides of the pond. Period. See ya in inflation land. The ride into 2012 will be a real roller coaster now!

I told you all in March/April that  August is when the fun would REALLY START. AND IT HAS. 

The summer is always a good time for cooking, revving up the motor, for preparing a major step change...

imapopulistnow's picture

Soros started this crap.

Lazane's picture

time for Spain to fork over all the gold they have stashed away in exchange for payment on their sovereign debts, it is time to settle up all the new world gold they heisted from the America's.

Instant Wealth's picture

Roger that, Goldman Sucks. Let´s put 4 trillion euros in the EFSF and all is fine.


MsCreant's picture

The ECB can - and has in the past - sterilise its purchases of sovereign debt, so that the liquidity in the banking sector, and hence the potential inflationary risks, remain contained.

Money laundering. They print this shit with a straight face.

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