I do love this confidence

France and Germany have reached agreement to boost the eurozone\’s rescue fund to €2tn (£1.75tn) as part of a \”comprehensive plan\” to resolve the sovereign debt crisis, which this weekend\’s summit should endorse, EU diplomats said.

The growing confidence that a deal can be struck at this Sunday\’s crisis summit came amid signs of market pressure on France following the warning by the ratings agency Moody\’s that it might review the country\’s coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone.

So, the market is saying that the cost of raising the €2 trillion could push France into the Spain/Italy corner of high interest rates leading to if not solvency, certainly liquidity, problems.

Thus everyone\’s running around saying that raising the €2 trillion is a lovely solution?

What?

Here\’s actually what the problem is. OK, so we need to throw lots of money at the bond markets. We need to do this because Spain and Italy (no one cares about Greece any more, they\’re gone) need to roll over their old debt. As they do this at the current high interest rates they have to pay they go bankrupt. So, buy lots of bonds, raise the price of their bonds and lower the interest rates they must pay as they roll over debt. Thus they don\’t go bust.

So far, so simple.

However, that\’s not the end of it. We could pay for this by the ECB printing lots more money and buying said bonds. But we\’re not allowed to do that, that\’s monetising the debt and this is verboeten. So, other governments have to come up with the cash. And we\’re worried that France doesn\’t actually have enough cash to do this without getting into the same sort of debt spiral that Italy and Spain are in.

That France doesn\’t have to actually come up with the cash, that perhaps the EFSF could instead be leveraged, guarantee the first section of losses on debts, thus boosting the €400 billion to €2 trillion: that doesn\’t actually solve very muich. All we\’ve now devised is a way for France to take an option, borrow under a different guise. France is still on the hook and France still might not be able to pay if required.

In short, we\’re not sure that France is good for the money so why is everyone cheering a \”solution\” that requires that France be good for the money?

Oh, and just to make it even better, if France ain\’t then we need to rely on Germany: and no, alone, not even Germany has enough money.

10 thoughts on “I do love this confidence”

  1. With the EU and other nation’s growth going into a trickle and even possibly into negative flood I think the writing on the wall has gone from pen and ink to neon.

  2. Here’s actually what the problem is. OK, so we need to throw lots of money at the bond markets.

    Even if France and/or Germany had trillions of Euros sitting around doing nothing, in my opinion the belief that we need to throw lots of money at the bond markets is the problem. The market, specifically Spain, Italy, Greece and their creditors in this case, will sort out a solution just fine by themselves. The solution is likely to be rather unpleasant for all concerned, but that’s as it should be. Markets exist to provide feedback to the market participants. Spain, Italy and their creditors have already failed, so it is counter-productive to intervene and stop them getting the appropriate feedback.

  3. Nobody’s got enough money, it’s that thing where under fiat, M0 acts as the equivalent of the commodity (pseudogold!). So, any bailouts have to be in M0, and nobody has got that much. It’s the credit card problem; so long as you’re below your credit limit, you can borrow to pay the monthly repayments; the instant you hit that, you need real money with which to pay them, and you haven’t got any, which is why you were borrowing in the first place.

    The system is bankrupt. At some point, they’re going to have to face that reality and do a reboot.

  4. The news that the leaders of Europe are not hiding in their bedrooms, covers pulled over their heads, hands pressed to ears repetitively chanting “la -la-la-la-la….” & are currently in the kitchen furiously wanking over the collected works of John Maynard Keynes is confidence enhancing?
    Sheesh

  5. Ed, I think you are forgetting something. France doesn’t want to solve the euro crisis, it just wants the whole thing put off until after Sarkozy has been relected.

    The can needs to be kicked down the road for that long. The fact that they will have filled the can with dynamite before said kick is a problem for after the election.

  6. Isn’t it time for the ECB to change its mind? In normal circumstances it would not be a good idea, but these are normal circumstances, are they?

  7. The attitude of the G20 speaks volumes. Apparently the Eurozone’s problems are its problem. Never mind the extent to which the rest of the world has hung its economic prospects on the success of the Euro project – which was deeply flawed from the start and in my view always doomed to failure. It isn’t possible for the Eurozone to fix this mess on its own, whatever its leaders may say – and however much markets may want to believe them. The Eurozone countries simply don’t have enough money – as Tim points out. This is a global problem and requires a global solution.

  8. Offshore Observer: Sarkozy kicking the can down the road until he is reelected? Or until he isn’t and it becomes someone else’s problem? 🙂

    Nick: Is the ECB allowed to change its mind and print lots of money? Even if it is, printing trillions of euros isn’t even the wrong solution, because we don’t have a problem. Left alone the reckless will struggle through or go bankrupt and the prudent will survive. Hard lessons will be learnt by all, so we might actually do better in the future.

  9. They always seem to “reach a solution” and still fail anyways. The market speculators are dumb enough to buy the same dead euro parrot that is always pining for the fjords.

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