The Eurozone Bailouts Question No Ones Asking
Interest-Rates / Eurozone Debt Crisis Jun 18, 2012 - 12:16 PM GMTBy: Graham_Summers
While everyone else is focusing on the Greek elections, the REAL issues pertaining to the EU (namely where the funding for Spain’s bailout as well as future bailouts will come from) continues to be ignored.
Indeed, no one seems to be asking THE key question regarding the EU: Just WHERE is the money for this bailout going to come from?
There are essentially four key options for this: the IMF, the EFSF, the ECB, and the ESM (the Fed won’t do it).
Unfortunately, NONE of them are viable options.
The IMF?
As noted earlier, the answer here is a resounding “NO!” as Obama won’t propose a European bailout during an election year (hence his desperate pleas to Angela Merkel to hold the EU together for the next six months).
The EFSF?
Germany won’t allow the EFSF to fund the Spanish bailout as it would increase Germany’s exposure to the Spanish fall-out. The public outrage regarding the EU is growing in Germany by the day (55% of Germans believe they would have been better off keeping the Deutschmark while another 78% believe the worst of the Euro is ahead)
The ECB?
The ECB has completely avoided any notion that it would fund the bailout. Indeed, at the ECB’s most recent press conference, ECB head Mario Draghi stated,
Draghi Says ECB is Ready to Act as Growth Outlook Worsens
“We monitor all developments closely and we stand ready to act,” Draghi told reporters in Frankfurt after the ECB left its benchmark rate at 1 percent. Downside risks to the economic outlook have increased and “a few” of the ECB’s Governing Council members called for rate cut at today’s meeting, he said…
“I don’t think it would be right for the ECB to fill other institutions’ lack of action,” he said.
An additional item I want to note regarding the ECB… it hasn’t actually bought any EU bonds in 13 weeks, signaling that while it may act in terms of providing liquidity to banks… it has ceased actually monetizing EU sovereign bonds (another indication that Germany is the REAL EU backstop as Germany was completely against monetization).
ECB keeps bond programme on ice, pressure on govts
The European Central Bankbought no government bonds for the 13th week running last week, ECB data showed on Monday as the bank judges the controversial programme of diminishing benefit in the face of the deepening euro zone debt crisis…
Two of the bank’s German policymakers quit last year over the purchases, which critics say treads dangerously close to the ultimate ECB taboo of financing governments. The ECB also fears that its interventions give countries less of an incentive to implement the necessary and sometimes painful reforms.
http://in.reuters.com/article/2012/06/11/ecb-bonds-idINL5E8HBA6420120611
This ultimately leaves the ESM, the permanent European Stability Mechanism… which technically doesn’t even exist yet (it’s supposed to be ratified by July 2012).
Indeed, in order for the ESM to be ratified it needs the individual EU member states that will contribute 90% of its capitalization to first ratify it on an individual basis.
Here’s the list of countries that represent that 90% of capital as well as the status of their individual ratifications and the percentage of funding they are to provide:
Country |
Ratified? |
Percentage of Capital |
| Germany | NO | 27% |
| France | YES | 20% |
| Italy | NO | 18% |
| Spain | NO | 12% |
| Netherlands | YES | 6% |
| Belgium | NO | 3% |
| Greece | YES | 3% |
| Austria | NO | 3% |
| Portugal | NO | 2% |
| Finland | NO | 2% |
| Ireland | NO | 1% |
| Slovakia | NO | 0.8% |
| Slovenia | YES | 0.5% |
| Luxembourg | NO | 0.2% |
| Cyprus | NO | 0.1% |
| Estonia | NO | 0.1% |
| Malta | NO | 0.07% |
To summarize the above chart succinctly… only four of the required 17 countries have even ratified the ESM (it’s supposed to be completely ratified in July 2012).
Moreover, you’ll note that the PIIGS as a whole are meant to contribute 36% of the ESM’s FUNDING!!!! Spain and Italy alone are meant to contribute 30%!!!!
So… Spain is supposedly going to be bailed out by an entity that doesn’t even exist yet… for which Spain is mean to contribute 12% of the funding. And to top it off… Spain hasn’t even ratified the fund itself!!!
More importantly, neither has Germany. And it’s not clear that it will either.
Folks, the real deal is that Europe is out of money. End of story. The only entity that could prop up Spain is the ESM… which doesn’t even exist yet.
So if you’re banking on the fact that the Greek elections mean the EU will survive or that Spain’s “bailout” has solved its banking issues, you’re going to be in for a very rude surprise before the summer’s end.
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Good Investing!
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Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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