Tag Archives: EFSF


Guest post. Translated from the French by Tim Gupwell

What was the plan being drawn up last week in Rome which Merkel refused to sign up to? The other three participants, Mario Monti, Mariano Rajoy and François Hollande advocated using the EFSF, and in the near future the ESM, directly, to bail-out the banks without adding further to the public deficit (thus breaking the link between these two types of debt), as well as using them to purchase sovereign bonds in order to ease market tensions.  Spain and Italy would be the principal beneficiaries of these measures.

But there is a ‘catch’ to these dispositions, which are supposed to rapidly resolve the stark problems. The combined means which the two funds would dispose of would be quickly used up, meaning either that they would need to be boosted by appealing to the states which finance them, or that a banking license would need to be granted to the ESM to enable it to access the ECB’s liquidity… The two taboos that the Bundesbank refuse to break are a pooling of debt which has not been thought through and which is at Germany’s expense, and an ECB intervention to relieve the rolling over of public debt.

Continue reading STICKING TO ONE’S PRINCIPLES…, by François Leclerc

TREASURE HUNT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Following the clues for the next bail-out of the Spanish banks is proving to be a veritable treasure hunt. To participate, follow the guide!

Initially, the EFSF (European Financial Stability Facility) is going to borrow funds on the markets, using the member states guarantees, in order to lend them to the Spanish Government, which will subsequently lend them to the banks for the bail-out. The result of this haywire approach will be a transfer of debt from the private sector into the public sector.

But in the meantime the banks have subscribed to public bond issues from the Spanish state, destined to finance its debt, using funds lent to them by the ECB to enable them to do so. To make such an operation possible, the Central Bank will lower their requirements regarding the quality of the assets put up as collateral by the banks. Bearing in mind the differential in the rates, it will be a profitable operation for the banks since they will end up lending at higher rates than they borrow at.

What conclusions can be drawn from all this at the end of the day?

1 – The ECB is playing the role of bad bank, which the Spanish government didn’t create, by taking on all the toxic mortgage-related assets.

2 – The bailing-out of the banks is increasing the public debt, which the State was already struggling to reduce.

3 – The rescued banks have been further endangered since they now hold even more of this debt, which may need restructuring in the near future

If the logic behind these measures is jumping out at you and you have found the treasure at the end of the hunt, then you could be the ideal candidate to apply for a post at the Euro Working Group, the organism of bureaucrats who prepare the meetings of the Eurozone financial ministers. If not, maybe you could envisage starting up in the near future on a blog hosting a column about the European debt crisis.

BACK FROM LOS CABOS, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Given that the G20 has confined itself to mere generalities and that the European Summit on the 28th and 29th June is dangerously close, what can be expected of the meeting in Rome on the 22nd June between Angela Merkel, Mario Monti, Mariano Rajoy and François Hollande, intended to serve as preparation for it?

Two projects are being examined in parallel by the European institutions, which are being assembled together and presented as if they were one of Great Wonders of the World. Firstly, by issuing Eurobonds with a short maturity- and thus with limited risk – and secondly by the creation of a fund intended to bring together and finance over a period of 20 to 25 years the stock of debt which exceeds the threshold of 60% each country’s GDP – these countries will have to demonstrate their credentials beforehand with regard to their budgetary commitments. Thanks to these virtuous arrangements, we will all be saved and the chaotic debt-reduction strategy will finally work as it should!

Intended to ease the pressure on the debt-reduction strategy, this wonderful arrangement will not, however, get Europe out of the recession which is the main cause of the investors’ lack of confidence. Due to its global dimension, this prospect was at the heart of the discussions at the G20. In order to help private sector debt-reduction, these two complementary measures will be coupled with a ‘Banking Union’ based on the doubtful premise that the banks will be able to finance their own rescue-packages without any external intervention.

Continue reading BACK FROM LOS CABOS, by François Leclerc


Guest post. Translated from the French by Tim Gupwell.

Some important details are still lacking with regard to the Spanish banking bailout plan: its final amount, which is going to depend on the results of the audit commissioned by the government; its rate, which we will be coming back to; and the stabilizing measures for the banks which will be associated with it. These will include massive lay-offs in the banking sector and will further worsen the unemployment situation.

One other aspect has, however, not been highlighted enough. The funds will have to be paid out – at least initially – by the EFSF, which itself will borrow them on the financial markets using the guarantees of its members (which include that of Spain itself). It remains to be seen under these conditions, at what rate the EFSF will be able to borrow in order to then lend on to Spain. The whole of the edifice will be further weakened, with the guarantees relying de facto on an increasingly limited number of countries.


DIFFERING DELUSIONS, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

Worried by the sight of the Europeans entrenched in their respective positions, Barack Obama reached for his telephone. The day after the G7 videoconference between the Finance ministers and the central bankers, of which nothing came, he successively called David Cameron, Angela Merkel and Mario Monti. With this latter, the strengthening of the discussions centered on the Euro zone and growth. With David Cameron, who is going to meet Angela Merkel in Berlin, it was about the need for an “immediate plan”. Of the conversation with Angela Merkel no details have emerged. All promised to keep in contact with Barack Obama over the coming days, before meeting up on the 18th and 19th June at the G20 in Mexico, a sign that there is still plenty of work to be done before an agreement is found between them.

Expecting nothing from the governments, tensions on the stock and bond markets eased off all the same, bearing witness to their hopes of a renewal of central bank interventions. A meeting of the Bank of England is due on Thursday, as well as the expected appearance of Ben Bernanke, the chairman of the Fed. While the ECB, which met today, is keeping its cards close to its chest in order to force European leaders to assume their responsibilities, the Bank of England may well reactivate its debt purchasing programme, which has only been temporarily suspended. Looking further ahead, the possibility of a reduction in the key ECB interest rate, and an eventual third wave of massive loans to banks, continue to raise hopes, though Mario Draghi clearly stated that they are not ready to take these steps at the current time. By opting to not renew his purchases of Spanish debt on the secondary market, he sent a clear signal that the ball is in the court of the governments.

Continue reading DIFFERING DELUSIONS, by François Leclerc