Tuesday, June 19, 2012



The main bail out sources for sovereign countries in difficulties are the IMF, the EFSF and the ESM.

The IMF was never conceived to rescue any of the world’s major economies, and as the largest provider of funds is the USA, they have resisted providing funds to the EU. Quite correctly they insist the EU should be capable of looking after itself.

The EFSF, described in detail in an earlier posting, was an ad hoc emergency facility established last year, and will be replaced in July, 2012, by the ESM or European Stability Mechanism.

The EFSF  fund has  EUR 200 billion, and once ratified the ESM will have up to EUR 500 billlion at its disposal. Needless to say the ESM is not yet funded and the funding will come from the major EU economies, Germany and  France, etc.  Spain and Italy as well as being contributors, are also shaping up to being major claimants on the funds resources.

At present of the total EUR 700 Billion notionally available, most of this is already spoken for to bail out Greece, Portugal and Ireland, without counting the probability that Greece will shortly come back for a third bail out.

Although estimates vary, the likely bail out amounts required for Spain and Italy are around EUR 800 Billion. Normally they would be net contributors of EUR 180 Billion, so it means that the most of the  EUR 980 Billion ESM funding requirement, will fall on the remaining “solvent” members namely Germany and France. This puts Mr Hollande’s EUR 140 Billion growth fund in its true context.

In effect Spain and Italy will shortly be shut out of the credit markets and in order to avoid default a credible mechanism  needs to be established to find the  EUR 980 Billion.

This sum is approximately the amount of China’s holdings in US treasuries, built up over the past 20 years.

Many solutions to this problem have been floated, making the ESM a bank so it can leverage itself 10 times more and buy up the bad debts, getting the ECB to buy all unwanted bonds, allowing the ECB to go on a further LTRO / QE spree etc etc . None of the above solve any thing, apart from kicking the can down the road, and only serve to exacerbate the problem.

If it were not for Merkel’s stubborn resistance all of the above would probably already have been done.

The EU by procrastinating have completely boxed themselves in, with multiple countries collapsing at the same time. They may not yet have run out of holiday destinations, but they have certainly run out of options. 

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