Tuesday, November 1, 2011



Last week saw the much vaunted “solving” of the European Financial Crisis, by the raising of EUR 1 Trillion, for the EFSF, by far the biggest single debt fund, in the history of the planet. First country to be rescued is Greece.

Those who believe in knowing the truth would seek answers to a few niggling little details:

Will the voluntary 50% Greek haircut be enough?

The latest projections suggest that with a 50% haircut, the Greek debt levels will over time reduce to 120% of GDP. Curiously enough, this was the level which triggered panic in the first place as being “unsustainable”

Can we trust the Greek Projections?

To date they have been wildly underestimated. Austerity creates a vicious downward spiral of reduced tax revenues and increased social costs, and runaway deficits.

Why has a 50% haircut been called “voluntary?

If it were compulsory, the regulator ISDA would be obliged to declare a default event, which would trigger default insurances, and greatly heighten contamination risks elsewhere. Even worse insolvent banks would be forced to book their losses. As the main objective is to protect the banks from facing accounting reality, the regulator has essentially been complicit in calling it a voluntary haircut.

Will shareholders of solvent banks hold the Boards of Directors accountable for giving in to blackmail?

The word is really extortion and it will be interesting to see the class actions against institutions. Look at the fallout from the Lloyds /HBOS shotgun marriage.

Why is the ECB exempted from taking a 50% write off?

Well “some are more equal than others”. The ECB which is the largest single holder of Greek Debt, face value EUR 55 Billion, would face losses of Billions. The ECB has a Capital of EUR 5 Billion, so such a write down would bankrupt the ECB overnight. By the way the ECB has “invested” a further EUR110 Billion, in other Government bonds, all in much the same condition as the Greek debt. The only solution is simply to misstate the true value of ECB assets, hold investments at cost, and get compliant auditors to sign off.

If the ECB goes BUST who pays the bill?

The other Central Banks are the first port of call. As they are all strapped for cash, a move to double the capital last year from approximately EUR 5 Billon to EUR 10 Billion, has only resulted in EUR 1 Billion being funded.

How can the ECB with a Capital of EUR 6 Billion buy EUR Billions of debt?

Despite being called a Central Bank, the reality is that if it marked its debt holdings to their market value, it would be more appropriate to call it a bankrupt overleveraged hedge fund, which under Swiss Law would be considered to be trading fraudulently.

How can a broke ECB continue buying Sovereign Debt of insolvent countries?

The ECB buys from the holders of the Sovereign debt, namely the banks and financial institutions, which would otherwise be bankrupted by the losses. All this money is to save the Banks, none to help the real economy.

In summary the bankrupt ECB buys from the bankrupt banks the un-payable debt of bankrupt countries?

You have understood the situation PERFECTLY.

So how does the EFSF (European Financial Stability Fund) solve the problem?

It does not, although it allows politicians and Central Bankers to pretend that it does. The EFSF would be far more appropriately named the Extended Fraudulent Salami Fund, as it much more clearly describes its function.

With EUR 1,000 Billion in the Bank, surely the problem is solved?

Firstly the fund is EUR 440 Billion, and it has not yet been funded. The countries that should fund it include the insolvent PIIGS, who pay in on one hand and take out with the other. It is basically a shell game; now you see it now you don’t.

This leaves Germany who has capped their contribution, exactly for the above reason, and of course the UK theoretically a contributor to support a currency that is not even theirs. You really could not make this up if you tried!!!

Secondly there are no confirmed sources of the other trifling amount of EUR 560 Billion. The Germans are out of the game, and the Chinese, the other potential source of cash, are being feverishly courted at present. What exceedingly high price will be exacted for their contribution, (human rights, exchange rates; technology exchange, trade mark violations, military accommodations, etc.) remains to be seen.

Perhaps all the above would be tolerable, if the EUR 1.000 Billion would fully solve the problem. However all the evidence suggests it definitely will not?

The realistic amount of un-payable sovereign debt in the Euro Zone is believed to be of the order of EUR 2,500 Billion.

What is meant by leveraging the fund or making it an insurance company?

This means that the basic EUR 440 Billion is paid in as capital and the remaining EUR 560 Billion is borrowed. The next question is from whom, and the answer of course is from the same bankrupt banks who are requesting a bail out. Having received a bail out and getting cash for severely impaired assets, they would then loan back the money and charge the EFSF interest.  

The insurance company solution, as yet an undefined pipe dream, would be a repeat of the AIG disaster in the USA, where an insurance company that was totally under-capitalized insured enormous financial risks. When its clients filed the claims, AIG went bankrupt and needed a government bail out, officially of some USD 60 Billion, but the truth?

Mr Sarkozy wanted to make the EFSF a bank, and leverage the fund further, a solution that Mrs. Merkell violently opposed. The first question is, why if the EUR 1 Trillion fund was enough would further leverage be necessary? Is there perhaps something we are not being told? The other issue is that by being a bank it would have the right to access liquidity through the ECB.

In summary an illiquid EFSF could borrow money from the bankrupt ECB

You have understood the situation PERFECTLY.

It is my sincere hope that this Blog post analysis, imperfect and simplified though it may be, will assist in making the reader fully aware of what is really going on.

I also challenge anyone reading in Brussels, or elsewhere, where this Blog will be an anathema, to demolish the facts or the arguments and post their comments. As they say in French, “qui ne dit rien a consenti”. He who says nothing has agreed.

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