EuroZone Crisis

BarroMetrics Views: EuroZone Crisis

“Europe will act in concert to prevent another Leman’s” – that was the hope and that hope has proven to be unfounded.

Two problems remain:

  1. How (and whether) the European Financial Stability Facility can be scaled up to 440B – the amount needed for the bailout fund; and
  2. The level of haircut the Greek bankers will take.

There are two options facing the scale up:

  • Using the EFSF to offer guarantees to purchasers of new euro zone debt, and/or
  • Using part of its capacity to set up a special purpose investment vehicle. The vehicle would attract buy the debt from funds obtained from sovereign wealth funds and other investors.

According to Reuters: ” The numbers are not yet finalised — you have to have all parameters in place and see what is needed and what the leverage factor would be. It needs a lot of technical work to come up with a number,” one EU official said, adding that discussions would continue on Wednesday to forge a pre-summit consensus.

The leaders will agree on the options tomorrow, but whether it will be an agreement with all details remains to be seen. I think it will be challenging — it will be very difficult to agree on everything.”

The second centres around the 60% as teh loss Grek banker’s must take in return for a second bailout package. FT reported that Germany had gotten France to agree. The banks are prepared to accept 40% and warn that a larger amount would be seen as a forced default. Germany appears to have discounted as likely that the 60% would provoke this response.

Finally, there is a third issue:  Italy is facing a massive debt due to its pension system. It has a public debt of 1.8 T Euros – 120% of GDP. The EU/IMF does not have enough funds to bailout Italy.  France wants direct ECB intervention; Germany is dead against it.

The European problems will be placed on hold until Nov 7 – 8 when the Finance ministers again meet. But, if the market reaction on Oct 25 is anything to go by, Europe is running out of time – the time to find a solution if it is to prevent a full-blown market reaction to the crisis.

3 thoughts on “EuroZone Crisis”

  1. Greetings Ray. I’ve been watching Eastward with interest on this issue. Here is an excellent article by Willem Buiter on why the math of the EFSF fails, even on a leveraged basis:

    http://www.zerohedge.com/news/why-doing-math-behind-efsf-insurance-policy-leads-willem-buiter-conclude-it-not-bazooka-pea-sho

    The only way it “works” is with ECB coordination, either through supporting the secondary market for existing debt (buying bonds) or facilitating the recapitalization of the Eurosystem banks. Both are inflationary, so unacceptable to the Germans.

    I’m far from an expert on these matters, but the only way I see the Germans going along with an ECB support option is if they wring concessions from other member states regarding the renegotiation of the key Euro treaties. This involves a de facto transfer of sovereignty of the weaker states.

    The other option is for Germany to simply leave the Euro, if only temporary, and return to the Deutsche Mark. The highly connected Pippa Malmgren discusses it here:

    http://www.pippamalmgren.com/79.html
    http://www.pippamalmgren.com/80.html

    Either way, the stakes are high, so I expect brinkmanship to push the resolution as far as possible, similar to what we went through in the US with the debt ceiling a few months ago. Accordingly, another full-blown Lehman-style crisis is in the cards, though probably not the most likely scenario.

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