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?
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.