Monday, September 24, 2012

With A Big Enough Lever

... you can declare the entire EU bankrupt. Dig this.
With the launch of the permanent common-currency bailout fund, the European Stability Mechanism (ESM), just around the corner, euro-zone member states are looking into ways to leverage the €500 billion ($647 billion) available to the fund, SPIEGEL has learned. But with Finland still concerned about the leveraging plans, it is unlikely that they will be initially included when the ESM is launched on Oct. 8.

The plan envisions the continuation of leverage instruments currently in use in the temporary euro bailout fund, the European Financial Stability Facility (EFSF). Should they be applied to the ESM, the permanent fund could be able to mobilize up to €2 trillion instead of the €500 billion lending capacity it currently has -- a size that would make it easier to provide emergency aid to countries as large as Spain and Italy, for example.
Translation: They need two trillion euros to bail everybody out today*, but they only have 500 billion. So they're going to do what banks do and lend more than they have in deposits. This is called leveraging. It works when you are lending to people who can pay you back. In the case of the EU, since no one will ever be able to pay them back, they have a fallback plan.

Print. Print. Print.
Summary: They thought they could make do with 500 billion, but that was too small. They need 2 trillion. It's impossible to raise that kind of cash, so it's time for some flim-flammery and simply declare that 500 billion is equal to 2 trillion.

No, this isn't unstable. Not at all.

* - They're all socialists, so they will need additional trillions later. There's no way on Earth they're ever going to do anything but lose money.

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