Via Peter Tchir of TF Market Advisors [13],
A quick look at the headlines:
€200 billion already committed. So the EFSF has already committed €200 billion. So far I only see €63 billion of debt issued by the EFSF, so they have at least another €137 billion to fund. The bulk of their issuance so far is back to back with a they made to Greece, hardly the best collateral. For now I’m going to assume that there is no overcollateralization requirement and just €200 billion has been committed, but if the 165% overcollateralization is in place, then that would really be €300 billion of “guarantees” used up.
The “Permanent” facility would be allowed to run in conjunction with the EFSF. As far as I can tell, basically each and every country would need to approve this. Most countries seemed to have only approved a maximum amount of support that could be allocated between the EFSF and ESM. Will they really all sign on for more? I find it hard to believe that Finland will be excited by the prospect since they already negotiated their way out of standard EFSF and into some form of collateralized lending. Slovenia had enough trouble the first time around, so why would they want to? Cypress seems to be getting dragged down by the Greek economy. Poor little Estonia must be wondering when the Eurovision song contest got all mixed up with this Eurozone concept.
For now, let’s assume that every country approves running the ESM in conjunction with what has already been committed (I find it hard to believe that everyone will agree, but let’s just make it easy for now). Then the EU has €500 billion of new money to play with – allegedly. It has all become such a blur, but the ESM had the same concept of “stepping out” members and potential overcollateralization that I am not sure that €500 billion is achievable. I think it is only a headline, but again, let’s pretend they can get to €500 billion.
Okay, let’s make a capital call for the full amount. I will assume it is based on the same percentages as EFSF with the 3 stepping out members. Italy, please pay €96 billion. Spain, we need €64 billion from you. Where exactly are Spain and Italy going to get that sort of money to pre-fund the deal? They aren’t. That is the big scam here again. It is “self-insurance”. The vehicle will not be pre-funded in a meaningful way since the countries don’t have the money to put up. There may be some amount of paid-in capital, but it will be small. Then the ESM, just like the EFSF (which may still need to issue €137 billion) will issue bonds whenever it needs money, and only use the “capital calls” in extreme circumstances. This is actually far worse than having the money up front – as problematic as that may be, because this plan will shift virtually the entire burden to Germany and France if it ever gets used.
Let’s say that Spain finally decides it needs money and actually “steps” out. When each of Greece, Portugal, and Ireland used the EFSF facility for money, they “stepped” out. That is both reasonable and logical. But what does that mean to France and Germany? With Spain participating, they had to put up €145 billion and €109 billion respectively. If just Spain steps out when they need money, the contribution rates for the other countries goes up. Now Germany, France, and Italy are on the hook for €167 billion, €125 billion, and €110 billion. Let’s now assume that when push comes to shove the Finns and all the small contributors decide to “step out” too. The problem is getting too big and they realize they are just hurting themselves more by participating than they would be affected by actual defaults.
Then the big 3 go up to €175 billion, €132 billion, and €116 billion. Also Belgium, not the best credit to begin with needs to cough up €22 billion. Are they really going to be there for that money when called upon? Getting paid in capital is problematic, and may even actually count against deficits, but not getting paid in capital is more dangerous. You are counting the commitments of people who need the money. It is like me getting a loan from the bank and trying to make them more comfortable by telling them, not only will I co-sign my own loan, but I will give them a guarantee that I will pay it back.
Nothing has changed. These are the same people who constantly try to overwhelm current problems with huge headlines and promises of a better future. They don’t have the money, and never will. They also promised speculators in Greece would lose their shirts.
Maybe they can get the paid in capital by having LTRO3. Spanish banks can issue bonds to themselves. They can get Spain to guarantee those bonds. They can then pledge the bonds to the ECB. Then they can take that money and buy Spanish government bonds. Spain can use that money to fund their share of ESM. Then they can get ESM to give them more money, partly coming from other countries.
And yes, the IMF is our money and if they fall for this, it is just shameful.
I have ignored the other potential bit of money, where “if in an emergency” and only for up to 1 year, could residual EFSF money be used. All the same problems as getting money from the ESM when Spain or Italy needs it, coupled with actual votes. Not worth including in your calculations, in spite of how quickly the media has rushed to get the bigger headline out.
We need to see the details, but be prepared to be underwhelmed.