"The Europeans Have Finally Thrown Big Money at the Problem."
Not if you look closely. Proponents of Europe's response to the crisis point to two acronym-laden rescue funds, the EFSF and the ESM, with combined financial firepower well in excess of $1 trillion -- far more than the U.S. Troubled Asset Relief Program (TARP). These rescue vehicles, they say, represent serious commitments of cold hard cash to eliminate the systemic risk in the European banking system. Sadly, there's relatively little real money being ponied up and the actions of Europe's central bank, the ECB, may have only made things worse.
The EFSF has no actual money. Zero. It's really nothing more than a pool of promises from eurozone countries to pay creditors sometime in the future if there's still no cash in the till. Relying on these promises, the EFSF was supposed to raise its entire funding on capital markets, but it doesn't have a great track record in doing so. As a result, though the EFSF is authorized to borrow up to 440 billion euros, it has only raised around 30 billion euros so far.
With no actual cash and limited investor appetite for their bonds, the EFSF simply declared its own bonds to be as good as cash, and provided them to recipient countries, banks, and investors instead of the real money they couldn't actually raise in the markets. It's anyone's guess how the bonds will ultimately be repaid in the end.
The second vehicle, the supposedly new and improved ESM, is a similar story. For starters, while its money is already being committed, the treaty authorizing it has yet to be ratified in several member states. The all-important German courts have even raised serious questions about its legality. But even assuming the ESM is found to be legal and is ratified, its ostensible 500 billion euros in funding will be mostly a mirage. The ESM is structured so that 80 billion euros will be contributed by eurozone countries over 30 months. The remaining 420 billion euros is supposed to be raised in the capital markets, with investors expected to buy bonds relying on guarantees provided by eurozone countries -- several of which themselves may end up being the recipients of any money that the fund actually ends up raising.
On top of all this, market investors are increasingly concerned that the one entity seen by many observers as the ultimate savior, the ECB, is part of the problem. They fear that the ECB will be able to ensure that it has repayment priority, therefore limiting the prospects for other investors if a country runs into trouble and can't pay on time -- or at all. These concerns are well-founded: that's just what happened in Greece last spring.
So Europe's "rescue" funds are largely unfunded. They are based on hopes that markets will provide enormous amounts of cash on the back of financially engineered government promises not recognized on their sovereign balance sheets, with investors' wariness about their treatment at the hands of the ECB only making matters worse. In an already difficult funding environment, it is hard not to be just a little skeptical that the rescue funds won't necessarily have all the money they need exactly when they need it.
SUBJECTS:
