Sunday, September 25, 2011

European Debt Crisis: Fighting Leverage With Leverage

The rumor mills are flying this Saturday regarding a Multi-trillion plan to save the eurozone....Mish: Will the ECB, IMF, and France go along with that? What about the German parliament?...
Mish, the Eurozone ain't going anywhere, so it doesn't matter "is so-and-so going to go along with that?" Everyone will be made to see that it's in his interest to "go along." This much can be counted on, even if the means which bring it about are anybody's guess.
Telegraph:The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain’s financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.

The complex deal would see the EFSF provide a loss-bearing “equity” tranche of any bail-out fund and the ECB the rest in protected “debt”. If the EFSF bore the first 20pc of any loss, the fund’s warchest would effectively be bolstered to Eu 2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion.

Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.
We like this. Confront a painful debt deleveraging with more leverage. This is telling.

What does it tell? It tells that an actual deleveraging is, as Soros put it, "too terrible to contemplate." It tells that the brightest minds in the world are committed to forestalling the inevitable, to rolling the stone uphill, to suspending the laws of economics and mathematics, to, basically, faking it. Can you do this with your debts?


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