10th May 2012
Yesterday there was an example of a political and media furore over the matter of a 5.2 billion Euro payment from Europe to Greece due today. In essence some Euro officials were attempting to threaten Greece and much of the mainstream media followed them like lap dogs. But this payment and the paper tiger threat surrounding it illustrate nicely some of the themes of this blog and also allow me to address a subject I often get asked about which is the monetary merry-go round of the Euro zone "rescue" system. So in best Play School fashion if you are sitting comfortably I shall begin.
Why does Greece need the money?
This is the easy bit. She is in severe economic distress and not only is running a considerable fiscal or budget deficit -which contrary to promises and claims is showing little sign of improving- but she has a considerable national debt which needs refinancing regularly due to its size.
Step forward the European Financial Stability Facility or EFSF
This part seems simple as the EFSF was due to make the payment today and according to its website it offers this:
"EFSF bonds offer top quality diversified supranational class exposure. This is due to the guarantee of the shareholders, the euro area member states."
As figuring out if the first sentence actually means anything may need a post all of its own let us consider the second and think about the shareholders/guarantors. In fact let us consider just one Spain. She is a guarantor of 92.5 billion Euros out of the 780 billion theoretical capacity of the EFSF and was engaged in the part-nationalisation of Bankia (45%) which was announced last night. This puts Bankia at step 7 of my time line for a bank collapse. It also puts Spain with a ten-year government bond yield of over 6% again and looking more likely than even to be a recipient of EFSF funding itself.
I was being nice to the EFSF about its 780 billion guarantee as Greece,Ireland and Portugal have already "stepped out" and accordingly it is down to 726 billion Euros. Now if you face the prospect of taking Spain away too you begin to see why I christened it the unstable lifeboat. In fact in my view it is so unstable it needs its own lifeboat! In a severe crisis it will founder.
Let me give you another illustration of this and it also came yesterday. The EFSF raised some 1.96 billion Euros of 3 month money. You may already be smelling a rat here and you would be right to do so. An organisation that is providing long-term financing to Greece- as let's face it Greece will not be able to repay this money for a very long time if at all- is raising three month money. Sounds a bit like the Northern Rock business model of lending long and borrowing very short does it not? Whatever happened to Northern Rock?
And if we look at the 1.96 billion it does not compare favourably with the 5.2 billion required does it? And of course there are the programmes for Ireland and Portugal too. Apparently it is called a "diversified funding strategy" although it slips its mind to say that much of the funding is coming from the European Central Bank. It seems to bother few people that the EFSF has loaned some 103.7 billion Euros and rising to Greece whilst it has only raised via bond issues some 58.5 billion Euros! And of course much of that was for Portugal and Ireland.
The "lifeboat" looks ever more like the Titanic to me….
The European Central Bank
The European Central Bank has been busy as you can see above electronically creating money to fund the EFSF. Or if you prefer to think of it this way the ink-jet printers have been whirring frantically! These days though central bankers prefer not to use the old fashioned method of actually printing notes and currency as you see it doesn't create the money fast enough. Modern electronic methods are much more to their liking. Indeed they seem to have taken their motto from a children's cartoon character (h/t Alen Mattich)
"To infinity and beyond"
You scratch my back I'll scratch yours!
So far it seems that the ECB is helping out the EFSF like a friendly Labrador but of course we know that it is more of an Alsatian and we find out from the EFSF the details of this and the emphasis is mine:
"An amount of €4.2 bn will be disbursed on 10 May. The remaining funds of €1.0 bn are not needed before June and will be disbursed depending on the financing needs of Greece. As with previous disbursements to Greece, the EFSF will transfer the €4.2 bn into a segregated account which will be used for debt service payments."
Debt service payments? What about actually helping Greece?
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