Something not wholly uninteresting happened the other day at the EFSF

In the midst of a great deal of inanity coming from Mr Klaus Regling, the head of the European Financial Stability Fund (EFSF), the precursor to the European Stability Mechanism (ESM) that will come ‘online’ later this year (assuming the German Parliament and Constitutional Court do not throw spanners in its works), one of his underlings made a statement that is not at all insignificant.

As you know, the EFSF is the Special Purpose Vehicle that was set up in May 2010 as the eurozone’s temporary bailout fund; an outfit for amassing the billions necessary to ‘save’ Greece et al from default. As I have spent much energy criticising the structure and rationale of the EFSF I shall desist from doing so here again. Suffice to say that the EFSF gathers the funds necessary for the bailouts by issuing CDO-like, toxic eurobonds.

Presently, the EFSF has raised, or is committed to raising, €192 billion on behalf of Greece, Ireland and Portugal, leaving €248 billion for a second or third helping for these countries plus whatever Spain will be needing in the short run (a need that can only be satiated otherwise by a third LTRO from the ECB). Before the ECB’s Mr Draghi flooded Europe’s banking system with a trillion of liquidity, the EFSF’s bonds were suffering dramatic falls, raising questions about its viability. It was one of the reasons that Mr Draghi decided to turn to the printing presses and risk the Bundesbank’s wrath in throwing all moral hazard considerations to the wind and taking the root toward the Japanese-isation of Europe’s banks. At the very least, his strategy led to the fall in spreads of all eurozone bonds (except Greece’s of course). Naturally, the EFSF’s own bonds were relieved too.

Mr Regling had this to say on 16th March, during an announcement of the EFSF’s next bond issues[1] (€1.5 billion in 20-year to 30-year bonds on 19th March, €2 billion in six-month bills on 20th March, followed by €3 billion or more in five-year bonds on 22nd March): “The euro-area strategy to resolve the crisis is working… Markets have recognized the progress made by both member states and the euro area as a whole. Yields have fallen significantly since November last year for euro-area sovereign bonds and also for the EFSF bonds.” Pull the other on Mr Regling. The only thing the markets recognised was that the ECB was pumping liquidity like there is no tomorrow into insolvent banks in exchange for their reluctant commitment to pass some of this on to the stressed public sectors of the Eurozone, including the toxic EFSF.

None of the above was remotely interesting or new. The nugget of gold was uttered during the briefing by the EFSF’s Chief Financial Officer Christophe Frankel. Here is how Bloomberg related his words: “The EFSF is moving to a new system for recouping its funding costs that will charge all countries the same rate. Funds raised will be pooled and no longer attributed to a particular country, and all countries will pay the same rates.”     

This is a significant statement. Depending on how it is interpreted, it amounts, almost, to a declaration that the EFSF’s eurobonds may be turning less toxic and more akin to genuine union bonds. Alas, none of the financial journalists present bothered to ask Mr Frankel what he meant precisely. If he meant that Greece, Ireland and Portugal are going to be repaying at the same interest rate, this is only a small step in the right direction. If, on the other hand, he intimated that the donor countries, who are guaranteeing the debt, will be paying the same interest rates in order to provide the EFSF with its funding basis, then the EFSF’s eurobonds are edging toward the status of jointly and severally guaranteed eurobonds. I do not think that the latter was what Mr Frankel meant. But even if he did mean it, much water would have to flow under the bridge before the eurozone could be said to have acquired its sine qua non; i.e. proper, homogenous, non-toxic eurobonds.

Still, whatever Mr Frankel meant, this small announcement deserved more attention than it got.

[1] Taking together all three bailouts so far, the EFSF will need to projects it will tap markets for €54.2 billion euros in 2012, €37.9 billion euros in 2013 and €33.8 billion euros in 2014.


  • The BN article is:
    From the wording, I understand that the CFO of EFSF means that the bailed-out countries will be treated identically in terms of interest rate on bailout funds. This could be of importance for Greece, not to be isolated as a unique case, but instead, to be part of a broader consideration of the problem. In such a case though, Germany will still opt for holding the “Put option” of the Euro exit (returning to D-Mark or forming a North E-Zone), should markets force SP-IT (Spain or Italy) to enter the mechanism

  • “The EFSF is moving to a new system for recouping its funding costs that will charge all countries the same rate. Funds raised will be pooled and no longer attributed to a particular country, and all countries will pay the same rates.”

    My reading, perhaps, lends a further interpretation; that the EFSF has disconnected its funding from the central bureaucracy and passed that responsibility directly onto the member nations, with each being responsible for an equal share of the costs in proportion to their input. So the question becomes; does that they will take the money directly from each treasury; without regard to any public debate in the European Parliament chamber or by its elected members?

    Ergo; a complete suppression of any ongoing debate about the motives, quantities and origins of the funding.

  • “The EFSF is moving to a new system for recouping its funding costs that will charge all countries the same rate. Funds raised will be pooled and no longer attributed to a particular country, and all countries will pay the same rates.”

    To me this statement means that Merkel will no longer be in charge of the EU crisis management.

    Merkel has been fired and a new structure is now replacing her abominable lack of knowledge and skill in the vital area of EU finances.

  • I hope Dean is right and the EFSF crew is making a move to go around Merkel. I don’t know the crew at EFSF, but Draghi/ECB must have been OK with Frankel’s declaration. If Dean is right this move will help, somewhat, in sidelining the austerity hawks. AND… its a move to put in place a key piece of Yanis’ Modest Proposal.

    NOW… bring in the European Investment Bank!

  • Being a German taxpayer I do certainly hope that “the German Parliament and Constitutional Court do throw spanners in”. Because I am totally fed up with being plundered for the interestes of the finance industry and the rich everywhere. And for some foreign nation’s profligacies during the past decade or so .

    One should have a comparative look at how the real incomes developed in Germany since, say, 1998, and in the GIPSIFs. And please note that the working class in Germany was never asked if she wants to participate in this austerity for exactly this class.

    • Exactly. I am not German, but I pay taxes in Germany. The working class and others were never asked to engage in this dangerous and unnecessary experiment “the Euro”.

      Who bailed out Germans in 2000 when it was the sick man of Europe?

      Lets hope that in the 3 German state elections the extremists on all sides will win a lot of votes.

    • Professor Flassbeck noted that Germany would have to increase wages at a rate of 4.5 pc during 20 years to adjust trade imbalances, while wages in southern european countries should increase at a significantly lower rate (but increase at least). That would be the only way to save the euro-zone. But as we all know this won’t happen. So just forget about the euro. It’s over.

  • It will be interesting to see for how much longer the German people remain silent taking their orders from Mario Dhaghi. This is a debt union which is being unilaterally introduced by one man.

  • I noticed an interesting piece of info in the Bank of Greece monetary policy essay for 2011-12.
    In page 28 it says:
    “Greek Current Account deficit was reduced at 9.8% of GDP from 10.1% in 2010 and 14.9% in 2008.

    Furthermore it is important to add that:
    Current account deficit not including net payments for oil (which i add is a net payment for all non-oil producers) and net payments for central government’s debt servicing (interest payments) is almost zero (0,1% of GDP).This deficit has been steadily reduced from 7.1% in 2007 to 6% in 2008 to 4% in 2009 to 2.3% in 2010 and is expected to turn into surplus in 2012.

    The balance of goods and services with oil and ships not included turned to a surplus of 1.8 bil in absolute numbers, for the 1st time after 2000, in contrast to a 2.8 bil defict in 2010, 7,2bil in 2009, 10.1bil in 2008 and 10.2bil in 2007 (which was the largest for the whole period from 2000 to date).”
    It is obvious that this money drainage is due to interest payments.One more detail that makes interest payments more important is the fact that in a country that is issuing its own fiat currency in a floating exchange rate system, whenever there are interest payments of the government’s debt to foreign bond holders, the money is not really transfered outside of the economy rather it is held as a liability of the local central bank.The owner of these deposits has limited options on what to do with them:
    1)He can use them to buy goods,services etc which would decrease the trade deficit
    2)He can use them to buy assets as in direct foreign investment
    3)He can sell them,which would only result in a change of the ownership of these deposits and a relative fluctuation in the exchange rate.
    In any case the money doesnt really “flee”.

    In contrast when a eurozone government (say Greece) makes payments to its bondholders the money is effectively transfered from the local central bank to the central bank of the bondholder’s country (Say France).

    • Yes, but Crossover you also need to consider the growth side of the equation. Take for example this other German nonsense of a huge photovoltaic park in northern Greece called Helios, designed to export electricity into the German market and northern Europe peripherals.

      You already know that solar has been deemed a subsidy driven business in Germany and the majority of such subsidies have been scaled back or eliminated. So, in essence Germany is dumping on Greece some first generation technology (w 10-15% efficiency factor at best). Then you have the problems with intermittency and storage. But the biggest problem of all is that in order to transfer electricity from a solar farm in Greece to Germany, one has to improve the most antiquated grid line transmission corridor through the Balkans.

      So, let me summarize the German position for you: Germany wants Greece to invest in a heavily subsidized, archaic solar technology for which Greece has to sign 25 year long contracts to buy such electricity at premium. It then will have to improve the transmission grid of at least 10 countries before it reaches the German market.

      And to add salt to injury there are currently innovations in the lab of photovoltaics with 60+% efficiency. Which means that if the new solar park was to be fitted with the new technology then the same park could produce 6 times more energy.

      Now, do you understand why we are so skeptical of German proposals towards an improved Greek economy? Because they are full of self-interest, hardly make any sense and they only line up German pockets.

    • Dean i agree, the whole thing about Helios is a joke no matter what point of view you see it from.You already explained why its a joke in terms of helping the Greek economy.I might add its a joke from an energy innovation point of view.All countries should switch to high energy reflux projects instead of this.On the same manner they want to liberalize the coal market for no obvious reason….maybe we should switch back to coal fueled trains too.

      But my main point with my post was that we’re not so unproductive as they like to say in order to hide the actual problems under the carpet.Our current account deficit is due to oil and interest payments.
      45% of our deficit (which is 4% of GDP) is due to interest payments.The remaining 55% (5% of GDP) is due to oil.And its uncontrollable since we are on the mercy of its price fluctuations (as most countries).This also means that if a real haircut took place it would have really helped.which is not the case under the current psi deal.

    • Dean, this solar idea is absolute nonsense. You are correct! If you check out the correlation between power prices across EU countries you will see that Italy and Germany are totally disconnected. reaon: Missing links in the grid. So how would the power come to Germany over the Balkan?

      Crossover, your oild/interest analysis is nonsense. If your total revenue is 100, your total cost is 110. You run a deficit of 10. In your example interest and oil would be 6 and 4 respectively.

      Of courese it makes sense to look at the other cost of 100!

    • Crossover:

      I got your point now. You may want to view the Elias Papaioannou @ the Harvard Kokkalis program posted in Yani’s entry about the German publication of his book.

      Whereas Yani has the best future solution, I think Elias answers a few questions usually raised here.

    • NEUD:

      I know it’s nonsense. But it is precisely what they have been promoting as a viable solution.

      I can only convey the disappointment over such thoughtless public subsidy schemes.

    • Ans lsot around EUR 10 billion on the haircut, plus is loosing >10 billion p.a. on interest rate advantage since 2000. Plus will lose around EUR 500 billion with the current guarantees for the GIFPIBS.

    • 10 billion lost in the haircut. the nationlized banks lost.
      10 billion lost due to interest rate convergence is due to capital that left Germany after the introduction of the Euro. The German workers lost. They had to reduce their real incomes in order to keep their job. Remember 2000 Germany was called the sick man of Europe. Noone helped, no bailouts! Capital whent to the South, German domestic (no export) industry plummeted.

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