There Is No Bailout Spoon: The Math Behind The Re-Revised EFSF Reveals A "Pea Shooter" Not A "Bazooka"The latest and greatest plan to bail out Europe revolves around using the recently expanded and ratified €440 billion EFSF, and converting it into a "first loss" insurance policy (proposed by Pimco parent Allianz which itself may be in some serious need of shorting - the full analysis via Credit Sights shortly) in which the CDO would use its unfunded portion (net of already subscribed commitments) which amount to roughly €310 billion, and use this capital as a 20% "first-loss" off-balance sheet, contingent liability guarantee to co-invest alongside new capital in new Italian and Spanish bond issuance (where the problem is supposedly one of "liquidity" not "solvency"). In the process, the ECB remains as an arm-length entity which satisfies the Germans, as it purportedly means that the possibilty of rampant runaway inflation is eliminated as no actual bad debt would encumber the asset side of the ECB. A 20% first loss piece implies the total notional of the €310 billion in free capital can be leveraged to a total of €1.55 trillion. So far so good: after all, as noted Euro-supporter Willem Buiter points out in a just released piece titled "Can Sovereign Debt Insurance by the EFSF be the "Big Bazooka" that Saves the Euro?" there is only €900 billion in financing needs for the two countries until Q2 2013. As such the EFSF would take care of Europe's issues for at least 2 years, or so the thinking goes. There are two major problems with this math however, and Buiter makes them all too clear....Buiter's unpleasant, for Allianz, Merkel and Sarkozy conclusion is that "that would likely not fund the Spanish and Italian sovereigns until the end of 2012. It would not be a big bazooka but a small pea shooter."
As Greece Launches Latest 2 Day General Strike, Unions Warn Of Austerity "Death Spiral" - A Primer On Greek PoliticsA few days ago we pointed out that Greece has now effectively shut down following a relentless barrage of strikes and occupations which not only have halted the economy, but now prevent the economy from even collecting tax revenues (one wonders if the country has finally borrowed the ink it needs to print tax forms, from Ben Bernanke). It appears the irony of the vicious loop whereby more austerity means more strikes, means less tax revenues, means bigger budget deficits, means more austerity, means even more strikes, has not been lost on the population, and now, according to Reuters, local unions warn that the country "risks sliding into a "death spiral" if the government continues to slash salaries and lay off workers instead of cracking down on tax evasion and raising money from the rich, the head of the biggest public sector union said Tuesday. "This will exacerbate recession, unemployment and state revenues will continue to fall, creating a death spiral. It must not continue," Tsikrikas told Reuters in an interview and urged lawmakers to reject the package when it is voted in parliament Wednesday and Thursday." He is right, and unfortunately for him, as the attached Nomura primer on near-term Greek politics indicates, both parties have no upside in severing monetary ties with Europe and realize all too well that unlike what G-Pap is saying, specifically that the country is being held hostage by strikes and protests, it is Greek strikes and protests that are holding Europe and its taxpayers hostage. However, since productive Europeans have no problem with that, it will continue indefinitely, even as the Greek economy grinds to a halt and nobody does or produces anything, and the entire country becomes a permanent ward of the European state, receiving its bi-monthly IMF bail out funding which in turn is flipped right back and used to pay off European bank interests. Rinse. Repeat.
Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss