“This Really Will Do the Trick” (Naked Capitalism)

SATURDAY, SEPTEMBER 24, 2011

Europe Readying Yet Another “This Really Will Do the Trick” Bailout Package

Well, we are clearly in crisis mode. We are back to weekends being a period when you need to watch the news in a serious way.

And in another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all. The problem is that was the premise of several of the last grand schemes, such as the EFSF and the ESM. The market calming effect relatively short lived because analysts quickly pencilled out the programs were inadequate in size and failed to address the problems of lack of a fiscal mechanism at the EU level and the need to address the elephant in the room, bank solvency.

The program in the works claims address the underlying issue of bank solvency, but even the sketchy leak of this weekend reveals it falls falls short, both in concept and in size.

The new rescue program seeks to create a sovereign debt crisis firebreak at Greece, Portugal, and Ireland, when contagion has already put Spain, Ireland, and Belgium in the crosshairs. The high concept is leverage on leverage plus monetization: the EFSF, which is basically a CDO, would then provide the equity to a new fund, and the ECD would provide “protected ‘debt’” I’m not at all certain what the latter is supposed to mean; reader input is welcome. But this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt. Nevertheless, this mechanism will allegedly allow for sovereign bailout program of €2 trillion.

Similarly, the size of the bank recapitalization program is in the “tens of billions”, vastly short of the €2-€3 trillion that some experts think is necessary. And note this is backwards: the debt needs to be written down directly (rather than trying to squeeze blood out of turnips via austerity) and banks recapitalized directly. Instead, the focus is (yet again) on bailing out the sovereigns, who will presumably still be expected to wear austerity hairshirts, which will worsen their debt to GDP ratios (even if this program does succeed in getting them cheaper debt in sufficient volumes).

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