The fiasco of the leveraged EFSF with IMF involvement

2011-11-30

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Eurogroup chief Juncker: ‘Other solutions’ are necessary (Photo: consilium.europa.eu)

Yesterday the President of the Eurogroup Jean Claude Juncker admitted that the EFSF will not be able to be levered up to 1 trillion euro as the October 26 Euro summit had initially hoped for (in vain). According to euobserver.com Juncker said “We have talked about leverage though private money, but it would be two or two and a half times an increase so not sufficient and we have to look for other solutions to complement the EFSF and that in my mind will be the IMF,”.

Of course back in October when I stated my objections to the plans to leverage the EFSF, I was seen by certain groups as the “euroskeptic”. Now Juncker seems to be turning into such “euroskeptic” as well. Juncker’s statement is correct, only he failed to tell the whole truth, by sticking on to the wildly optimistic view that private funds can actually lever up the EFSF, 2 or 2.5 times.

The reason this will not happen is rather simple. First when speaking of private funds we are basically referring to private banks. Second within the eurozone such banks that would be perfectly willing to buy the uncertain bonds of the EFSF are hard to be found, if any, either because they have already done the math and have realized that the bailout fund is nothing more than a tower of cards; or even if they are willing to invest, their funds are scarce, given the massive amount of capital they need to amass to meet the capital ratio criteria as set in the latest bank recapitalization programme. Either way the conclusion is rather straightforward, private funds will be insignificant.

So the alternative according to Juncker is to resort to the IMF to cover the gap. Yet the IMF is not an infinite source of wealth from where Europeans can draw funds at will. It also has limited resources, while it draws contributions from countries all over the world who would be more than reluctant to just increase the funding capacity of the IMF.

Understandably this will create all sorts of problems, so they are actually thinking of a new trickery. To allow the ECB to increase the funds of the IMF, an action that will not count as “printing money” and will theoretically get the job done. Yet this too is a Ponzi scheme once worked out that does nothing at all to address the underlying issues and to contain the negative dynamics that are at place.

The next few days will be crucial to see whether European alchemists can produce gold out of thin air, succeeding in buying additional time, or whether the euro will enter the final stages of its disintegration.