Sept 28, 2011
Is Dick Fuld running this show?
The Eurozone bailout, now being referred to as Euro TARP, is doomed to fail. While nothing has been officially announced the markets are rallying broadly on the back of a news article published by CNBC on Monday.  The details are lacking as to the actual structure but speculation is already running rampant across the financial markets as to what it might look like.
What is presumed is that Euro TARP will follow the proposal originally proffered by Tim Geithner  on his European trip recently. That proposal had been widely dismissed by the G20 as they couldn’t come to terms on any type of structure. The current idea outlined by CNBC will bypass the G20 entirely and allow the European Investment Bank (EIB), a bank owned by the member states of the European Union, to take money from the European Financial Stability Facility (EFSF) and capitalize a special purpose vehicle (SPV) that it will create.
The SPV will then issue bonds to investors and use the proceeds to purchase sovereign debt of distressed European states, which will hopefully alleviate the pressure on the distressed states (PIIGS) and the European banks that already own their sovereign debt.
If alarm bells aren’t already going off they will be in just moment as you get the gist of the rest of this disastrous plan.
The special purpose vehicle could then be used as collateral for borrowing from the European Central Bank (ECB), allowing the central bank to make loans to banks faced with liquidity shortages. Let me be clear on this. The European banks which are already undercapitalized and on the brink of failure will buy bonds issued by the SPV that is full of bonds issued by broke countries. The banks will then used these bonds as collateral to borrow money from the ECB. The ECB winds up with loans to broke banks and holding bonds backed by debt issued by broke countries as collateral. This is worse than circular logic, its circular borrowing akin to the Credit Default Swap (CDS) markets that helped sink Bear Stearns and Lehman Brothers, just with a European flair.
- A d v e r t i s e m e n t
Are you getting the picture yet? It get’s better. Let’s throw in some leverage.
The EFSF fund has already committed to providing emergency loans to Ireland, Portugal and Greece – the worst bets on the table. It is expected to provide over 100 million euros ($134.9 million) in additional funding for a Greek bailout. According to some estimates after those loans, the fund will be down to about 295 billion euros ($400 billion), So we assume they take roughly $200 billion or so from the European Financial Stability Facility to fund the special purpose vehicle.