Another Failed Grand Plan In Europe

"European Sovereign Yields have been under pressure for most of the last month...seems the market doesn't buy the firewall idea...



The EFSF has committed €200 billion. Depending on how you viewed EFSF, the maximum was €440 billion of funding at the AAA level (which it still has from Moody’s and Fitch). It could have been as much as €500 billion if it wasn’t focused on that maximum rating.

So how did we get a headline of €800 billion?

€200 billion of EFSF money that has already been committed got counted. They can’t commit it again. Yes this is money Europe has committed (more on how they fund it, later) which helped, but it cannot be committed again.

They also included €49 billion and €53 billion of loans already made to Greece under other EU programs as part of the firewall. Again, that €100 billion has already been spent, so it doesn’t really add anything.

Prior to today, the EU had €300 billion of remaining capacity and had spent or committed €300 billion. Now they have €500 billion of free capacity.

Let’s take a deeper look:

Last fall, Greece, Ireland, and Portugal had just over €600 billion of admitted debt (not the guaranteed hidden kind). So far, they have received €300 of EU commitments. Can we assume that a “bailout” is about 50% of a countries debt? Probably not, but it seems that the first round is less than 50%, but as it goes on, the amount grows beyond 50%, but it is eye opening, that 3 countries, with a total of €600 billion of debt, have needed €300 billion of support already – and look likely to need more. Ireland is getting a new extended payment plan. Portugal seems likely to need more. Greece may need more already to deal with the English law bonds, but in any case will likely draw down more.

So this €500 billion that is remaining, has to not only continue to support the existing countries, but in theory needs to deal with Spain and Italy. With €700 billion and €1.6 trillion, that seems dubious, especially once the mechanics are understood, but before we get to that, let’s look at what the EFSF has already done..."

at http://www.zerohedge.com/news/another-failed-grand-plan-europe

Goldman On Europe: "Risk Of 'Financial Fires' Is Spreading"

"Germany's recent 'agreement' to expand Europe's fire department (as Goldman euphemestically describes the EFSF/ESM firewall) seems to confirm the prevailing policy view that bigger 'firewalls' would encourage investors to buy European sovereign debt - since the funding backstop will prevent credit shocks spreading contagiously. However, as Francesco Garzarelli notes today, given the Euro-area's closed nature (more than 85% of EU sovereign debt is held by its residents) and the increased 'interconnectedness' of sovereigns and financials (most debt is now held by the MFIs), the risk of 'financial fires' spreading remains high. Due to size limitations (EFSF/ESM totals would not be suggicient to cover the larger markets of Italy and Spain let alone any others), Seniority constraints (as with Greece, the EFSF/ESM will hugely subordinate existing bondholders should action be required, exacerbating rather than mitigating the crisis), and Governance limitations (the existing infrastructure cannot act pre-emptively and so timing - and admission of crisis - could become a limiting factor), it is unlikely that a more sustained realignment of rate differentials (with their macro underpinnings) can occur (especially at the longer-end of the curve). The re-appearance of the Redemption Fund idea (akin to Euro-bonds but without the paperwork) is likely the next step in countering reality..."

Section 4 below is the most critical to understanding the pitfalls of the consensus thinking...



at http://www.zerohedge.com/news/goldman-europe-risk-financial-fires-spreading