THE INCREDIBLE SHRINKING EFSF
One of the many flaws in the EFSF bailout mechanism is that it is funded by the very problem children that it is intended to save. A good way to think of the fund is to imagine California, New Jersey, Nevada, Illinois, Texas, New York and Pennsylvania coming together to create a bailout fund. Of course, several of these states are financial disasters. When a country applies for aid to the EFSF they no longer contribute to the fund. So what’s going on as the dominoes fall is that the fund is actually shrinking (via FT Alphaville):
… it now looks something like this:
Germany 119,390.07 France 89,657.45 Italy 78,784.72 Spain 52,352.51 Netherlands 25,143.58 Belgium 15,292.18 Greece 12,387.70 Austria 12,241.43 Portugal 11,035.38 Finland 7,905.20 Ireland 7,002.40 Slovakia 4,371.54 Slovenia 2,072.92 Luxembourg 1,101.39 Cyprus 863.09 Malta 398.44 Total 404,143.20
So you can see the sad math here. Italy and Spain are vitally important contributors to the fund. And ultimately, it’s Germany and France that are shouldering the majority of the burden here with almost half of the funding coming from those two countries alone. So we have failing austerity and no central treasury that can actually bailout the states. Ultimately, the markets are likely to continue attacking these countries as the austerity measures fail to lead to prosperity and in fact worsens the crisis across Europe.
All road lead to Spain. If Spain is required to tap the EFSF it’s likely that further action will be required from the core countries as they realize they are on the hook for essentially funding the periphery nations. What Europe has essentially done is not unlike a huge bluff. They’ve placed an impressive looking gun on the table hoping that it’s mere existence would deter further problems, but the market is slowly testing the bluffer’s resolve. Ultimately, because of its flawed construction the EFSF is more like a water pistol and certainly not the bazooka that many hoped it would be.
A true resolution will require tough decisions at some point. Only true unity or abandonment of the Euro from some periphery nations will lead to a sustainable situation. Because the single currency system (like all single currency systems) is inherently flawed it’s difficult to imagine a situation in which this leads to sustained prosperity for all involved. Much political will has been invested in this currency so its failure is not an option. What I fear most is that the citizenry will ultimately realize that this flawed system is simply not working. If the politicians do not take matters into their own hands via a true solution the populace surely will.
Catch 22 – restructure and do what’s right, thereby inflaming the capital inadequcy of the core of Europe, or place the burden on the peripherals in the form of austerity and its futility, only to revisit the problem later.
There’s just no way out. I’m amazed the Xetra Dax has held up as well as it has given what seems to me the obvious implications of where these problems are headed (straight to the core).
Why is Austria crossed out?
AFAIK, in regard to Greece they are refusing to participate until figures can be verified … which is darned unlikely, given the circumstances. Effectively, they are “opting out” of the program. I would not be surprised if more of the smaller, more fiscally sound nations also starting drifting towards the exits, as this program is mainly an attempt to save big core bank (German, French, Italian) balance sheets.
There are two issues at stake here:
1) controlling fraud, so that resources are not wastefully misdirected & institutions plundered (ongoing)
2) managing, within survival tolerance limits, the currency supply needed by European populations
(this can be done by the ECB – regardless of what the member countries “return” as effective local taxes)
They’re gonna wake up at some point and decide what to manage, REAL GOODS budgets, or just nominal currency budgets. Their Treasury-by-committee debacle will force that sooner than here.
We still have to hope the USA wakes up to the same issue, faster – without having to drive itself to the same point of failure.
The European Financial Stability Fund…what a joke (and such a nice euphemism for it too). The countries (and their banks) owed money give more money to the countries that owe so they (the countries and banks owed the money) can be paid back. It’s like saying “You owe me $10, so I’ll give you $10 so you can pay me back.” And the markets have bought into this? Or, maybe they are finally getting wise that this is nothing more than a circuitous path to nowhere.
It’s more like “you owe 1,000b EUR, I’ll lend you 100b EUR so you can continue to pay interest”. And of course the core nations can now pocket the spread (a more cynical person than me would say that could be a reason why Merkel talked up the Irish spreads).
that would be the pretend part of extend n pretend, stef
just wait until the voting public gets wind of what going down.
” What I fear most is that the citizenry will ultimately realize that this flawed system is simply not working. If the politicians do not take matters into their own hands via a true solution the populace surely will.”
This is actually what I fear the least. I fear that they never will take matters into their own hands.
Neo-Liberalism must be crushed for us to break out of this death spiral.
You are 100% correct. In terms of creating change this would be a huge positive. In terms of market turmoil it’s a negative.
It took roughly 4 years to hit bottom during the Great Depression. Extend and pretend may have bought the world some time, but since we never actually addressed the massive imbalances in the world and have abandoned aggregate demand stimulation it will only be time before the wheels start coming off the bus again.
Spain and Portugal CDS up 8% on Irish news, equity markets un-moved.
Tpc changed his tube. During greece he said euro is destined to fail. Based on the commen ts from europeans in blog now he says too much invested in euro politically for it to fail. Good to see reality check.
I said it SHOULD fail. I never said it WOULD.
The Euro has to go. Either by choice now (less painful) or by inevitability later (harmful). Europe can’t maintain a static single currency while individual nations exist, either the currency has to become dynamic (or be dropped) or European borders have to break down with a single European government taking over, a United States of Europe. I’ve lived in Europe long enough to know that the USE will never happen.
The best thing for Europe would be to revert to a properly floating European Currency Unit (the old ECU was improperly constrained by the same idiots who eventually replaced it with the Euro (+-2.5% currency valuation range = mistake)). Nations would revert to domestic currencies while the Euro would be elevated to an SDR (ECU) like status, convenient for international transactions.
The ECU (like before) would be backed by a basket of currencies (member-countries). The % contribution to the ECU for each country would be automatically and regularly (daily) defined by the % GDP (of total) of each country and the relative valuation of that country relative to a stable external factor (eg gold or the ECU itself). It should not, under any circumstances be twiddled by men in suits, especially when those men are either bankers, economists or politicians.
I agree. It SHOULD be done away with, but I think there is too much political will invested in it by now for them to let it unravel. That likely means it will continue to exist in some form similar to its current form and it will continue to cause problems and crises periodically. My guess is that it will ultimately force some of the periphery nations out. Its current construction is simply not sustainable.
It’s remarkable to me that none of the Euro-fringe nations have at least threatened to leave the Euro. The Euro crowd have done an excellent job of capturing the will of governments with a force that exceeds even the pressure on government from that nation’s citizens.
When I was living in Europe it was clear to me that normal on-the-street people understood the problem of the Euro, particularly when bordered by a country that was not on the Euro. I saw this most obviously in Eastern Europe where countries that were formerly competitive with neighbours are now far behind (those on the Euro are behind those that are not).
Not only do people understand what the Euro has done, they see through the EU for what it *really* is: a chance for the dominant European nations (primarily Germany) to gain stronger access to markets of the Euro-fringe, out-competing and eliminating natives of the fringe. I found that people of the fringe remember how things were and while they appreciate some of the changes that have come about (better choice, better products) they understand that the downside is increasing transfer of wealth to the EU-core at the expense of the EU-fringe, and they aren’t pleased about it.
Most Europeans seem to actually get this, but amazingly it hasn’t (yet) translated into proper political outcomes. Europe is Europe though, so eventually there will be a push, and when it comes, it won’t be pretty or clean.
Tube = tune. What tpc does with his tube is between him and his tube
@Oroboros
Austria is being vague about Greece,. They say that they don’t think Greece should get the money if it fails to hit the targets, which it is currently doing.
But Greece was funded by a special one-off deal. Even if Austria tried to withold the money that would not affect their commitment to funding EFSF.
You point fair and true!
But please remember that support from IMF is the same sad story…