Pretty much everyone who is not part of the problem has seen the EFSF as unlikely to work very well, and has regarded the idea of a levered EFSF with the sort of amusement and disdain reserved for bad taxidermy.
We’d linked to an article in Friday’s Financial Times about the EFSF that had more than a twinge of official bluster and desperation about it. It first had the hapless CEO of the fund, Klaus Regling, complaining that he could not lever it enough because markets were too volatile. How ’bout the real reason: there aren’t enough suckers. Anyone with an operating brain cell knows that without ECB backing, a scheme to lend to borrowers in trouble backed by the very same troubled borrowers is not such a hot idea.
Now we learn things are probably worse than they seem (and remember, they already weren’t looking so hot). From the Telegraph:
The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland.
However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds.
Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.
The revelation will be seen as a major failure and a worrying sign of future buyers strike after EFSF officials and their bankers had spent recent weeks travelling the world attempting to persuade key investors, including China’s national wealth fund and Japanese government funds, to buy its bonds….
Other European Union funds are also understood to have supported the EFSF’s bond sale. The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted.
There have been rumors and news reports that German politicians want the ECB to go in and monetize Italian debt, but feel forced to deny that in public. One of my well connected European tea leaf readers said that while there were big campaigns up in the Euro press, there is interest, but no consensus. A move like this is still very controversial in Germany, He also noted:
Not much doubt that if Monti is appointed in Italy the ECB will buy for a while to make him look good. But that doesn’t mean they’ll do it all forever.
And they do need to “do it forever” or at least be perceived to be willing to do so, for an ECB backstop to work.
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The EFSF is just like another tall tale of Baron Münchhausen – lifting himself out of the slump like this:
http://www.goethezeitportal.de/fileadmin/Images/db/wiss/bildende_kunst/illustrationen/muenchhausen/abenteuer_herrfurt_2/7_Muenchhausen_Herrfurth__500x789_.jpg
The good thing with the EFSF is/was that it made the euro leaders admit that there is at least a trillion euro hole to be filled up. Now that the EFSF for the reasons discussed fails to take off, then the same leaders will be forced to recognise that ECB printing is the only real solution to get to the required 1-3 trillion.
The German media has over the past days began discussing the need for ECB intervention to avoid a meltdown. This is a total mental shift compared to only a month ago.
In parallel, the Germans may be warming up to the idea of a new Treaty that would affect the euro states only and that hopefully could be fast-tracked.
A voir.
I believe this is more representative of the epic EFSF fail.
Terrible Animal Taxidermy From Around The World
http://www.youtube.com/watch?v=ptJ3zDu0UtE&feature=related
Skippy…some expressions could be representative of buyers actual facial contortions.
“We’d linked to an article in Friday’s Financial Times about the EFSF that had more than a twinge of official bluster and desperation about it.”
Yes well not surprising from the FT, which is the most fanatically pro-euro newspaper in the UK, even beating the Independent and Guardian hands down.
My business use to buy 10 copies of the FT every day for waiting rooms and reception, we cancelled the account we all got tired of the lies and eu propaganda.
Actually its depressing as the FT was once the best financial paper in the world. Today its a load of crap.
As usual the EU know how to screw anything up no matter how simple.
Atleast the US and UK government are honest about monetising their debt, they do it on purpose, not because they were forced to because of lack of buyers for the debt.
The EU should just get on with it and monetise as it is the only way out for eurodebt issues.
But no doubt they’ll lie and bullshit european populations and frankly most eurozone populations are so beaten into the ground and shit-scared they’ll believe anything they are told by their eu over-lordies.
Make no mistake the eu is the evil empire today, they make the US look like a boy scout.
LOL ha! that would explain the exceptionally crappy anti-eu coverage they have of late. My favorite was saturday’s “Gilt are a safe haven and the UK is being rewarded” self congratulatory article. There is nothing going on but QE. Print money and buy your debt and for sure you will lower your yields. It doesn’t mean you are being ‘rewarded’ just the math of it.
And for those confused I have written an overview of the two main EFSF “solutions”. I lean towards the PUT/CDS one.
http://www.thedelphicfuture.org/2011/11/comparing-cdo-and-cds-like-solutions-to.html
Why should the ECB violate the sovereignty of the German nation and the will of the German people by monetizing debt – in effect, transferring resources from the South to the North?
And those of you who would condone this, how would you feel if the GOP decided to, by decree, turn Medicare into a defined contribution program?
The GOP would use the same excuse that the Eurocrats are using. The voters are too “ignorant” to realize what the need.
Is that what we’ve come down to? Completely disregard for the will of the voters?
Fear not. With Italy’s Monti and Greece’s new Papa, installed, unelected power continues to consoldate its stranglehold on democratic nations.
http://seeker401.wordpress.com/2011/11/12/new-italian-pm-european-head-of-trilateral-commissionyale-graduate-bilderberg-member-goldman-sachs-advisor/
http://en.wikipedia.org/wiki/Lucas_Papademos
With Hungary and France making hollow noises to save face prior to snapping to heel, the Wall Street/Fed Organized Crime Corporatists have their Eurocrats in full regime-changing swing everywhere the “market” somehow sees the opportunity on their behalf – funny how well “markets” reactions correlate so closely with the interests of the likes of GS, MS, and JPM, no?
So with Japan flat, and Europe flattening, and both headed for huge rounds of money printing, here’s Goldman Sachs advocating its latest unbelievably self-interested but otherwise lame recommendation that the Fed now target Nominal GDP while pretending its not the same as just printing gobs of money so unemployment can come down a couple % by trickling down enough loose change to ensure a a couple million of the crappiest jobs imaginable are filled for a couple years, nothing else having been changed to REALLY help the 45% of Americans now permanently trapped in the underclass over the last several decades, or the next 30% the ones who will most damaged by the (joke CPI) inflation.
As I’ve been saying for some time, the US has bet the farm that convincingly, by actions and policy in this brutal financial war, claiming the title of Strongest Amongst The Weak, it has regained the advantages held over Japan and Germany/Europe 2 decades ago (and 4 decades ago). Together with firing up the Fed’s presses and letting them rip, everything is coming together for another MAJOR Wall Street originated bubble IN THE US – everyone else gets serious inflation. And of course, GS makes out with more record billions whether it “works” even sort of, or not, as is evident from their release:
http://www.zerohedge.com/news/goldman-releases-qa-nominal-gdp-targetting-says-it-not-coming-long-time
I like RT’s link, but believe the apt EFSF reference might be to the Baron’s horse.
Oozlemonomics.
I really like that taxidermy video. But check this one out — it’s actually real (although it doesn’t have anything to do with taxidermy):
http://www.youtube.com/watch?v=3hOHY2eEXOY
Rumour has it that Crazy Gideon has closed his used electronics shop and is now in charge of corralling customers into the EFSF bond market through late night low budget television commercials.
Skeptics recant!
«There have been rumors and news reports that German politicians want the ECB to go in and monetize Italian debt, but feel forced to deny that in public.»
My usual quote from the famous sociologist Newt Gingrich, the bit where he talks about German voters and German politicians:
http://classwebs.SPEA.Indiana.edu/bakerr/v600/a_new_look_at_environmental_poli.htm
«In Germany on the Autobahn there is no speed limit. If tomorrow the Bundestag adopted a 100km, or 62-mph speed limit, virtually every German would obey it. Until, that is, the next election when they would wipe out the current politicians and they would elect the “No Speed-Limit” Party.
[ … ] let me suggest to you that the American cultural response to the challenge of speed limits has been dramatically different than [sic] the German one. For most Americans speed limit is a benchmark of opportunity. This is not a light insight.»
German politicians do fear their voters, even if their voters are small minded. But perhaps they are not that wrong.
«The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted.»
As usual it is not «lender of last resort», it is «donor of last resort», because if the ECB buys at face value Greek etc. debt there is no chance that it will ever be repaid.
The «lender of last resort» role of a central bank happens only if there if a liquidity crisis, and against good collateral, and at penal interest rates (Bagehot), not in an insolvency crisis where the central bank buys bad collateral at par to drive down interest rates (and boost other asset prices).
The big deal is that Greece, Ireland and Portugal will never be able to repay 90% of their debts, and this means that someone has to take a cramdown.
As to Italy and Spain, they are not yet insolvent, but they need significant debt restructuring, and that costs some money too.
As to the cramdown the options are:
* The lenders take the cramdown, and then they blow up because they are highly leveraged, and the governments of the lenders have to bail them out, ultimately rising taxes.
* The governments of the lenders take the cramdown, and this means higher taxes for their citizens, whether debtors or creditors, who can afford them, but don’t want them.
* The governments of the borrowers take the cramdown, and this means higher taxes for their citizens, whether debtors or creditors, who cannot very much afford them, and anyhow got used to boost their lifestyles thanks to borrowing from abroad.
* The ECB can take the cramdown, by monetizing the defaulted debt, which diffuses the cost to all the citizens of the EU, or more precisely to all the creditor citizens of the EU, which largely means those of the non defaulting countries.
My favourite solution is politically impossible, but would be in two parts:
* Germany extend their welfare system to Greece, Portugal and Ireland, to prove that they care about their fellow union citizens.
* The cramdown is paid by the debtor governments via much higher taxes, to prove that they are not just out to screw the Germans.
BTW I would expect that Germany paying for welfare benefits in bankrupts nations would be grossly abused, just as EU agricultural subsidies are subject to massive fraud in some of the same countries. But if that happened, I guess that Germany would then be vindicated.
BTW, as to massive EU subsidy fraud, some rural towns in Greece are some of the best markets for Porsche offroaders:
http://blogs.telegraph.co.uk/finance/ianmcowie/100012894/fast-cars-and-loose-fiscal-morals-there-are-more-porsches-in-greece-than-taxpayers-declaring-50000-euro-incomes/
Well, if the ECB is willing to “do it forever”, fiscal policy for the entire Eurozone will be set at the margin by the PIIGS, with every country racing to spend more (and delay any real budget cutting) before the ECB (really, Germany) changes it’s mind.
Incredible that this is bandied about as a “solution”, since this game is all about to the defectors go the spoils.
Is that what happens in the US federal system. Think about what you’re saying for a moment…
It’s not really what happens in the US federal system since taxes are redistributed out of one entity, Congress. That the eurozone does not have a single budgeting/disbursement entity is the flaw of the proposed ” solution”.
If I analogize it to the US, it would be like Rhode Island for example having an unlimited call option on US Treasury disbursements to spend on it’s RI inhabitants. RI spends it, UST pays for it.
Imagine having 50 state governments with that kind of spending power. It wouldn’t last long.
But that is the “solution” everyone is gravitating towards. I am not saying it won’t buy time to go for deeper political integration, it might. But I don’t think it will buy much time, or really be thought of as permanent if the political unification process does not rapidly move forward.
“If I analogize it to the US, it would be like Rhode Island for example having an unlimited call option on US Treasury disbursements to spend on it’s RI inhabitants. RI spends it, UST pays for it.”
Unless there was a simple budget cap in place that, when overrode, triggered the ECB discontinuing backing of the bonds…
Anyway, no European state has spent itself into inflation yet. And I don’t think they would. The simple fact is that some states need to recycle the surpluses of other states. (In the US this is done mainly through military contracts and the like…).
Your concern is just propaganda coming out of the Bundesbank. Take it with a pinch of salt.
I thought the original euro charter had a budget cap. Why would a new and improved cap be any different? And wouldn’t the whole point of an “unlimited” backstop by the ECB be rendered meaningless if, in fact, there was a limit?
It’s not complicated. The markets are “voting with their feet” now on the prospect of PIIGS adherence to controlling their budgets.
“I thought the original euro charter had a budget cap. Why would a new and improved cap be any different?”
Because such a cap would launch government debt back into the market and interest rates would spike. That would be a pretty powerful disincentive if you ask me.
Besides… why would a nation state like Ireland spend itself into inflation.
“And wouldn’t the whole point of an “unlimited” backstop by the ECB be rendered meaningless if, in fact, there was a limit?”
No. Just no. The misunderstandings of this stuff are just so stark.
Ever since the ECB backstop thing became mainstream (MMTers were considered ‘weird’ for saying this six months ago — but then, people have such short memories), everyone has become so confused about all this its unbelievable.
Anyway, what the hell is with all this concern with overspending? Have we looked at the unemployment figures in the periphery? (Not to mention the decline in German manufacturing and a possible impending Eurozone recession).
This ‘PIIGS’ will spend too much stuff sounds like its straight out of the Peterson Institute. It’s truly perverse.
Well you can ad hominem me all you want, but the reality is that people lend money based on perceived repayment capacity. ” overspending” usually factors pretty heavily into that credit analysis.
Is that why Japan has such low yields?
Is it just me or are events truly separating those who understand modern government budgets from those who don’t in the starkest of ways?
You might try applying your above analysis to this too:
Overall US Debt: http://www.cbsnews.com/i/tim/2011/01/03/image7209876.jpg
Interest payments on said debt: http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Images/Full%20Size%20Images/Global%20Econimic%20outlook/GEO-Q4-2011/GEO-Q4-Charts/dttl_dr_Fig8-USA_10yr-US-Treasury-bond-yields.png
Curious, eh?
Perhaps you didn’t understand me. Let me simplify it. I said that if the ECB is willing to print the money, the PIIGS will be the ones deciding how it is spent.
You may be “ok” with the idea of spending OPM, but I doubt the German core will be “ok” with it for long.
In any case, given your apparent adherence to MMT given the examples you cite, shouldn’t you be pushing for the PIIGS to leave the euro altogether? That way each country can print currency with as many zeros
on the notes as they like. Drachma, lire, peseta in basically unlimited quantities! Party time! You live in Ireland, right? Do you want Ireland to leave the euro?
I just don’t understand why you would think it is the ECB or Germans
responsibility to print on the PIIGS behalf. The currency was designed to be “hard”. Everyone knew that going in. You cited a budget deficit cap, and the euro already has it. If the PIIGS don’t want/ a hard currency, and think they would be better off with their own currency, they can opt out of the euro, right?
That is all I am saying. Politically, this is untenable over the medium term. It is highly likely that simply ” monetizing in unlimited quantities” will not work They can buy time and hope that attitudes change (in either direction) and/or that everyone “gets prepared” ahead of (hopefully) a
smooth transition into either a two- track or multitrack currency regime.
Philip, what BruceNY is saying is quite reasonable, though it is far off, not an immediate concern. It is not out of the Bundesbank or the Thief Thieferson Institute. Mosler & Auerback wrote an article bringing this up some months ago, pointing out that the rightly derided, rightly violated Stability & Growth Pact is however the only thing in the way of this, and there needs to be some such thing.
The solution of course is a common fiscal policy – a ECB funded Eurowide JG or percapita distributions being reasonable & fair solutions. Or dissolution of the currency union. Currently the ECB is insanely, criminally austere. And this comes after decades of absurd underspending in Europe, causing high unemployment compared to the USA, let alone postwar Europe.
It would take some time for Bruce’s concerns to be pressing. Currently, if the German Luftwaffe helicopter-dropped newly printed Euros over Greece & Ireland – it would enrich & benefit Germany greatly too, not just the current ECB victims.
Philip, why didn’t this happen in the Americas? Why didn’t the Fed simply continue to buy Argenian debt in 2001 so that Argentina could maintain the dollar as its currency?
I’ll tell you why. Because Argentina and the US are separate countries.
And so are Germany and Greece.
I can’t understand why so many NK readers who would be up in arms if the GOP attempted a similar maneuver in the US are condoning this blatant violation of democracy in Germany in particular, and the European continent in general.
I imagine that they would also have approved of US-led coups in Latin America over the last 100 years, justifying them because “we can’t trust the will of the people – they don’t know what’s truly good for them.”
Is that what happens in the US federal system. Think about what you’re saying for a moment…
Note re your discussion with BruceFrom NY:
Bringing up Japan as an example during a discussion of PIIGS spending behaviour/interest rates, willingness to lend to them is just not valid.
Japan has huge US reserves and has had a (often huge) annual trade surplus every single year since 1980 with the exception of 2009. They are able to do what they do only so long as they maintain that export strength year in and year out – everyone doing business with Japan knows they will get their money and virtually immediately, and of course Japanese capital is of immense value to WS.
Of course, the same behaviour on the part of Germany or China is now derided as “mercantilist” or worse, outright “aggressive”. Funny how the same goals, policies, practices land some in the “friends to be emulated” camp and others in the “enemies to be bashed” camp.
Its not just the EFSF thats coming apart.
Staff in the Irish central bank worked feverishly Wednesday through Friday to produce a ‘Top Secret’plan to set up a new currency predicated on a complete collapse of the euro by Christmas.The belief amongst senior management is that a euro collapse is a certainty.
Senior managers were in a state of panic and staff were required to work very late into the night on Thursday.
The plan is to be presented to the governor of Irelands central bank tomorrow morning.
Where did you hear this?
In order to permit the ECB to act as fiscal agent of the Italian government (via monetization), wouldn’t the ECB charter have to be changed?
Or is this just another “rule” that will be ignored in the name of expediency?
Then … uh, you mean ostensibly the majority of the German parliament is brain-dead? Which is why Merkel cannot provide German backing for the ECB to manage the EFSF.
So, what does this all mean?
It means that, as regards its National Debt, the EuroZone is having about as much of a problem with its parliaments as BO&Co is having with the American Congress.
Since identical situations have happened in Japan and Sweden, the cure has been dumping the loans into a BadBank (which is tantamount to Quantitative Easing as regards the Fed.)
Until Europe works its way around to that solution, not much can be done about BadDebt – except austerity measures that try to find more revenues to pay for the exaggerated debt maintenance. Largely due to American CRA’s.
So, who’s fault is it that Europe cannot seem to find a solution? Europa or Uncle Sam … ?
Why has America not had a diminishing of its triple-A rating? Because the CRA’s have the sword of Damocles hanging over their heads in the form of government authorized accreditation of their CRA-status. Without which they would go out of business.
Think about that …
Why has America not had a diminishing of its triple-A rating? Lafayette
Because the US can create endless amounts of money to pay its debts with? Because the US was not so stupid as to cede its monetary sovereignty?
I hear that next weekend the US is planning to adopt the yuan as its currency…
I think the problem is that Europeans haven’t made the whole scenario dangerous enough. If Greece would only go for the Dr. Evil business plan. This worked for American TBTF banks. Just announce the possibility of imminent default and destruction of the world’s economy. ECB, says, no our hands are tied.
Ultimately, the fed will do anything to prevent this, and they’ll just end up buying the crap bonds. What do they care anyway, it’s only fiat currency.
The problem is all the dithering is screwing up the planet’s economy. Really, Greece could still hold the referendum. This would create an unstoppable event. If they do this, and the Greek people vote for non-austerity, the Fed will be forced into the corner. Where’s George Soros when you need him, that’s what I want to know.
Which is what Angela Merkel did when the banks refused to extend the haircut of Greek Debt from 20% to 50%.
The banks fell right into line right away without a second thought …
Of the $14T National Debt, foreign countries own 46%. China itself owns $1.2T. Meaning China owns almost 20% of the amount owned by sovereign nations.
And America has not ceded its sovereignty one tiny bit.?
Yeah, right …
What’s that bird in the video? A dead parrot?
Mr Strether;
No, he’s not dead, he’s resting, or, if you like, pining for the fjords.
As someone pointed out during Herr Taxidermists previous appearance on NC, he’s wearing the Totenkopf badge of the SS on his forage cap. He could be an unwary early member of the soon to be dreaded Petersonnes Totenkopfverbande. Keep watching this space folks.
Taxidermy is such a good metaphor for Western economies.
A more musical version of Chuck Testa: http://www.youtube.com/user/schmoyoho
I had a phone call, turned the sound off, I was listening to an online radio station. Finish the call, putter on computer, and see this. I start the video, and hit the button to restore sound. Now, for some reason, the sound for YouTube was off, and the station I was listening to (and had forgotten about by this time) was playing Ozzie’s Crazy Train. The way it fit with the video was amazing…
I figured it out when the video stopped, and the song continued.
The EFSF was just another attempt at kicking the can down the road. Europe needs two things, much like the US, 1) big injections of money (that is an ECB backstop, much like the Fed’s) and 2) fundamental structural reforms. Europe is still dinking around on the first of these, but neither the US nor Europe have done squat on the second. So what we are really talking about is that the US is just better at extend and pretend than the Europeans. The bottomline is absent structural reform, liquidity injections are just throwing good money after bad.
Chuck Testa = average Rick Perry supporter.
Chuck Testa = animal lover = fantasizes about “stuffing” Michelle Bachman doggie style… Oops!…LOL
Chuck Testa = the dumb Koch brother by the same mother…
And finally,
Chuck Testa = Ace Ventura of the dead animal kingdom.
No one has explained to me how bad the Italy situation really is. I mean, the bonds went up to 7% or something like this, how long does it take for the debt to reach meltdown levels? Is a default comming tomorrow, or in a month, or in a year or 5 years.
Among all the panic, is it possible that Italy could eek out a few good years before the bonds all explode and kill the country?
From the Economist, this week:
Maybe Europe should build a railroad and (interstate?international?) highway system from Budapest to Limerick, and emerge with a strong central govt. A civil war is another option, if the comparisons to America are going to continue. Europes “problem’ is not the lack of a willing central bank, its different nations with different languages and different cultural perspectives which are often mutally antagonistic. Different laws and systems of govt dosent help and did I mention different languages? Its a political problem which there are no central bank fixes for.
THE STATE OF THE UNION
Europe’s “diversity” is also one of its most important attributes. One that makes it a very interesting place in which to live and raise a family.
Yes, often, it does bring about certain conflicts-of-interest, but nothing that is insurmountable. After all, the EU is still work-in-progress.
But most Europeans remain confident that it is on the right track. Strength devolves from union – in this case, the European Union.