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:
- How (and whether) the European Financial Stability Facility can be scaled up to 440B – the amount needed for the bailout fund; and
- 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.