When back in April we wrote about the huge expansion in the IMF's New Arrangement to Borrow (NAB) multilateral facility (which was expanded from $50 billion to over $550 billion), one of our observations was that "Funny money will galore. At this point nobody will allow anyone or anything to fail." And since all of Europe is about to be bailed out by the now insolvent ECB and the still somewhat solvent IMF, it strikes us as an opportune time to recall just who will bear the cost of this pan-European rescue. Surely, by now even idiots realize since the ECB is bailing out Europe, it is really bailing out itself, in a process described beautifully by Sean Corrigan recently, and any incremental money coming from ECB member countries will really go to themselves, and therefore its "new capital" contribution can be completely ignored. The same thing goes for European member countries of the IMF: that Ireland has pledged $2.9 billion to the IMF's NAB (not to mention Spain's $10.3 billion and Portugal's $3.4 billion) is late night comedy circuit fodder. Which is why it is not at all surprising that new capital will come from the US, Japan and China, in that order: the trio is about to spend over $250 billion (and soon much more) to rescue Club Med, as the Ponzi unwind shifts into a higher gear.
New, incremental sources of capital have been conveniently highlighted in the table below which lists the NAB participants and amounts pledged.
And just so there is no confusion, here is Nomura explaining why the existing EFSF framework is insufficient to fund even the rescue of Spain:
...Our estimate of total rescue funds available comes close to but does not fully cover complete three-year bailouts of Portugal and Spain (Figure 4). At the outset this seems to justify recent market moves given the likelihood also that if Spain was to roll over contagion would have room to extend further.
However, there are options open on this front that could make the numbers seem more palatable. First, it is not necessarily the case that potential rescue packages will look to cover the entire three years. In the Greek case for instance we project that the provided package effectively covered the funding gap into the latter part of 2012, the implicit assumption being that market access would improve by that time and that the sovereign would be at least partly be able to resume independent financing. Whether Greece is actually able to do this is another question. However, in the interim we see no reason why this approach would not be adopted for other countries. If nothing else it provides a signal to the markets of confidence in the underlying apparatus.
An expansion in the EFSF framework is another possibility and we note the amount of traffic around this subject over the last couple of sessions, most notable ECB?s Weber in, saying that he was convinced that interested parties would “do what is necessary to protect the euro”. Greater reliance on bilateral credit sources could be an outlet as well, with Ireland?s case showing that even non-euro denominated countries are willing to become involved where their own banking sectors are exposed. Overall. we think that Europe does have the underlying resources to accommodate the rescue of Portugal and Spain. Were the need to spread further though, Italy perhaps being the most telling example, worries over the ability of the region to cope could gain some credence.
Ergo: once Spain is under (+/- one month), then the full cost of the Italian and subsequent rescues will be increasingly borne by America.