ESM, EFSF, Or EB. Will Any Of It Work?

Via Peter Tchir of TF Market Advisors,


It appears that the market is cheering the move that the ESM will be implemented sooner than originally expected. That would be good if the ESM was materially different than the EFSF or if it was being done for some reason other than that the EFSF has been a total failure.

Imagine the applause when the EU decides to transfer the responsibility from the ESM to the EB (Eastern Bunny).

The EB is as likely to solve anything as the ESM is.

Fallacies about the ESM:

1) it can do more than the EFSF can - while that was true in August 2010 or whenever these were first announced, it is hardly true now. EFSF has been granted virtually all the same sort of risk taking (money giving) powers that the ESM has.

2) The ESM is "paid in capital" - yes, but minimal. Unless new documents come out the ESM was going to have actual capital of less than 10% and was going to rely on the guarantees and support of the members to issue debt in the market. Capital calls on the members by ESM seem slightly easier to make than under EFSF but the difference is only at the margin.

3) it could be 750 billion or a trillion. Since the very first EFSF announcement the headline number has been a bogus attempt to make things sound better than they are. Will there be "stepping out" members to reduce the amount? Will they try for a AA rating and thus be able to issue more debt in theory (while less clear in practice)?  Will debt strapped nations pull back from funding this?  Is it 100% voting so Finland would be happy?  Taking any EU headline number and dividing by 2 is a good starting point - remember the EFSF is already using up lines and who knows what else will be promised.

4) The ESM can be leveraged by the ECB?  Sure but as far as I can tell the ECB has been pretty good at finding loopholes to provide money to unworthy credit institutions for awhile. The questions are the same as leveraging EFSF. Will outside investors lend to a leveraged ESM? If the ECB lends to the ESM so it can leverage up and buy sovereign debt (including the bonds issued to make the capital contributions) what will have been done? As circular as it is, maybe that works or maybe that will be the ponzi that breaks the camel's back.