We’re a day from the “deadline” for European leaders to come up with a solution to their bank crisis – and it is a banking crisis, as evidenced by the fact that Greek bailout money doesn’t go to the people of Greece, it goes to bondholders. I can hardly believe that WaPo wasted column inches on a story that money to pay off debts accrues mostly to the holders of the bonds on those debts.
Slowly, more details are being provided on the ultimate resolution, with the caveat that there’s no consensus on which plan to use. First, those same Greek debtholders are being asked to take a 60% haircut on the bonds, which would stagger the entities with the most exposure. Germany has taken the lead in proposing this big a haircut, precisely because their banks aren’t as exposed as, say, France’s. But we can’t say for certain, however, because as Atrios points out, we don’t really know who owns what!
According to officials briefed on the talks, France, the European Central Bank and the International Monetary Fund remain concerned the tough stance could trigger bondholder insurance policies known as credit default swaps, sparking investor panic because of uncertainty over which financial institutions face CDS losses.
In order to keep the banks suffering from this bond loss solvent and creditworthy, and in order to keep the crisis from spreading from Greece to other countries on the continent, two additional steps need to be taken, European leaders say. First, the banks need to be recapitalized; according to a secret stress test, they would need €108 billion in new capital. Second, the EFSF, the European bailout fund, would need to expand greatly to cover contagion spreading to the larger troubled countries of Italy and Spain. Initially, €2 trillion was suggested, but now it looks like €1 trillion will become the target. But the story here is that Europe is looking to emerging markets to bail them out:
European leaders are closing in on an agreement to fight the region’s debt crisis by making their bailout fund worth more than $1.4 trillion, partly through public and private investments they hope will come from fast-growing countries such as China and Brazil, German officials said Monday.
The boost would come through using the emergency backstop to insure holders of Eurozone public debt against a portion of their potential losses and by setting up a fund that could attract outside investors such as the government of China. Both options would multiply the power of the bailout fund without demanding more money to be pitched in by the Eurozone governments themselves, which are leery of inciting taxpayer ire.
Increasing the firepower of the bailout fund — formally known as the European Financial Stability Facility, or EFSF — is considered crucial in the battle against the debt crisis, because its current size is too small to prop up major economies such as Italy and Spain if they come under attack from the markets.
The EFSF has already been deployed to combat market runs on Portugal and Ireland, so the idea that it has €440 billion available is misleading; it’s probably down to €250 billion. And the notion that China and Brazil, already witness to global investment nearly buckling from mass purchases of mortgage backed securities in the bubble years, would willingly buy tranches of European debt from a leveraged CDO strikes me as about as likely as House Republicans passing a “World FDR Appreciation Day” bill this week. And that’s to get them to half as much as what’s seen as necessary by most experts.
This is just the most wobbly leg of the world’s wobbliest three-legged stool.