ESFS, Greece, PIIGS and Banks: What You Need to Know

by CC September 27, 2011 11:30 am • Commentary

Here are some bullet points on the rumors out of Europe. First off, if you are hearing about this ESFS for the first time today, here’s what it is. Remember these are rumors and could have been leaked as a trial balloon to see the reactions to various proposals. Some or all of this could change, especially considering all the political moving parts involved. And some or all of the rumors could also be false. So here’s what’s out there:

  • EU will forgive 50% of Greek debt and increase the ESFS bailout fund to 2 trillion euros.
  • Leveraging up the current EFSF by 10x or 20x by turning it into a bank (by tapping into a credit line from ECB)
  • The original ESFS (which was around 440 billon euro) will now be levered up – potentially to 2 trillion+ euro (with backstops and guarantees from the ESFS and ECB)
  • 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
  • Some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF)

There are some potential pitfalls with the plan. Because this is basically using leverage to bail out an economic problem of over-leverage, if this were to go through and down the road sovereign defaults still happened, it would be the end of the Eurozone.

Then there are political ramifications. As mentioned above this is a way for something big to happen without specific ratification in many of the member countries’ parliaments, but it still needs to pass within the organizations involved like the ECB. The ECB has already lost two German members, they cannot afford to lose more.

So this is what it is at the moment, just a plan, and even more, just a rumor of a plan. If it was to become a reality, it is a big deal. This is Europe’s equivalent of the TARP bailout. Whether it happens, or whether it’s enough to stem the risk of both sovereign defaults and bank troubles remains to be seen.