European Debt and the EFSF – The Numbers Game

The Süddeutsche Zeitung (SZ) published a really interesting article on Friday arguing that the EFSF’s guarantees were in fact sufficient to last for all of 2012. I took a look at the numbers myself in order to check their math. The EFSF has been endowed with effectively usable guarantees of 440 bn €. Of the bailouts already agreed to, the first Greek package was financed bilaterally and thus does not affect the EFSF. Ireland will receive 67.5 bn € in total with 17.7 bn € coming from the EFSF. Portugal was promised 78 bn € a third of which (26 bn €) will come from the EFSF. Greece meanwhile has been promised a second bailout package of 109 bn €, the IMF will put up some of this money, which I have estimated as to be a third, leaving 73 bn € to be financed via the EFSF. Let’s see what that gives us (note that all figures here are in billion €):

Bailout promises given to / coming from	total	EFSF	IMF	EFSM	bilateral
Greece	110,00 €		30,00 €		80,00 €
Ireland	67,50 €	17,70 €	22,50 €	22,50 €	4,80 €
Portugal	78,00 €	26,00 €	26,00 €	26,00 €
Greece II	109,00 €	72,67 €	36,33 €
available funds total		440,00 €		60,00 €
remaining non-promised		323,63 €		11,50 €

The not yet leveraged EFSF thus has 323 bn € in guarantees remaining for countries apart from Greece, Ireland and Portugal. In addition to the Commission’s having an additional 11 bn € in unused funds lying around. What happens when we take into account the most recent leverage option, which assumes a multiplier of 3, then? For this we need to look at how much money the EFSF actually has dispersed already, not on promises it has given for the future.

Funds actually dispersed	total	EFSF	IMF	EFSM
Ireland	29,20 €	6,60 €	8,70 €	13,90 €
Portugal	30,40 €	5,90 €	10,40 €	14,10 €
					leveraged (3x)
remaining funds (minus Greece, Ireland & Portugal contributions)		397,15 €			1.191,46 €
+ minus Italy		318,57 €			955,71 €
+ minus Spain		266,35 €			799,05 €
+ minus Belgium		251,10 €			753,29 €
+ minus remaining promises to GR, IR & P		147,23 €			441,69

We also need to deduct those countries bowing out of its EFSF obligations because they are in receivership of aid coming from this company [sic!]. That still leaves us with almost 400 bn leveragable Euros, 1.2 trillion € if we assume a multiplier of 3 may be relied on. Now if we continue to play this (mind-)game and see how much money would be available if Italy, Spain and Belgium drop out, taking into account promises already given to Greece, Portugal and Ireland, we have only 147 bn € remaining, which gives us a leveraged 441 bn €. Let’s look at what kind of sums relevant countries (Italy, Spain & Belgium effectively as everybody else is either too small (Cyprus), already in receivership (Greece, Ireland & Portugal) or not (yet?) truly threatened (France)) are looking to refinance in the mid- to near-future.

Debt maturity	> 1 Yr
Italy	326,70 €
Spain	143,60 €
Belgium	80,00 €
total	550,30 €

In a worst case scenario of Italy, Spain and Belgium needing EFSF financing for their debt then, the EFSF even leveraged would not be sufficient for the Eurozone to even last 2012. The SZ needs to redo its math on this. Interestingly enough though, a leveraged EFSF would be capable of re-financing all of Italy’s governmental debt for 2012. Note that this overview does not take into account neither the ECB, further bilateral loans, the ESM, nor the remaining – admittedly limited – EFSM funds.

The New Europe in Speeches

Last week saw a flurry of relevant players weighing on the debate of how to escape from the crisis trap and shape Europe going forward. Lots of interesting ideas and proposals floating around.

The speech that arguably caused the biggest uproar was Radek Sikorski‘s (the Foreign Minister of Poland) in Berlin. He laid out a stark dystopian-utopian dichotomy of Europe warning of ‘disintegration with appalling human cost‘ (Yugoslavia) or federation, ‘deeper integration, or collapse‘. His choice is clear as he – in broad strokes – lays out what a reformed European Union could look like. His proposals effectively includes more majority-vote decision-making (even if he never explicitly says so), automatic sanctions to strengthen fiscal discipline, stronger roles for the Commission, the Council and the European Court of Justice, the European Central Bank (ECB) as a true lender of last resort (LoLR) and calling on it to act soon, a smaller (‘Member States should rotate to have their commissioner‘!), more effective Commission, an empowered European Parliament formed at least in part via ‘pan-European‘ lists. In other words a strong move towards a more federalized EU, spearheaded by the Eurozone but not taking place outside of existing community institutions and based on significant treaty changes. For this, in a striking statement, he calls for Germany to lead, to – finally – act. ‘I fear German power less than I am beginning to fear German inactivity.’

So much for Poland, in France two differing visions were put forward by President Nicolas Sarkozy in Toulon and the French Parti Socialiste‘s presidential candidate François Hollande in front of the Socialist Group in the European Parliament. Hollande attacks the German-inspired austerity model as a solution to the crisis and disdains the need for treaty change, he in turn proposes a pact of responsibility, governance, and growth (‘une pacte de responsabilité, de gouvernance et de croissance‘). Most notably this were to include an increase in the guarantees going to the EFSF, a partial European debt collectivization (maybe along the lines of the Redemption Pact proposed by the economic advisers of the German government), and the ECB as a true LoLR. He wants an investment program at the same time financed via Eurobonds (Me: ’cause that’s gonna happen…) even while promising to lower French debt in the short- and mid-term (‘un déficit de 3% du PIB en 2013, un retour à l’équilibre en 2017‘).

Sarkozy has less manoevure for campaign promises as the opposition candidate in his proposals on Europe’s future. He also wants to reduce French government debt, while also reforming labor market laws (‘la retraite à 60 ans et les 35 heures ont été des fautes graves‘). Sarkozy stresses the Franco-German partnership, ‘la convergence‘ between the two in a Europe of stability (‘une zone de stabilité‘). He puts forward the (Franco-German) company line of more European solidarity necessitating more (fiscal) discipline (‘L’Europe a besoin de plus de solidarité. Mais plus de solidarité exige plus de discipline‘). He wants to re-found Europe (‘Elle doit être refondée‘) not in a supranational manner though but in a (Gaullist) intergovernmental one. At the same time he wants to move more decision-making into qualified majority voting (QMV) procedures. He is in favor of a government of the Eurozone, essentially run or at least dominated by the heads of state and government. He wants to create a European Monetary Fund (EMF), which were to take its decisions under QMV. The ECB he considers an independent actor, while emphasizing his hope and conviction that it will intervene in the face of deflationary pressure. Finally, he is in favor of increased coordination on budgetary questions coupled with automatic and more severe sanctions for those states not adhering to the debt rules. All this should be reflected in a new treaty. One last add-on, in a typical Sarko populist move, he wants to revise Schengen to be able to deal better with immigration questions.

On to the Germans then, were Bundeskanzlerin Merkel laid out her vision in front of the Bundestag on Friday. Following Merkozy’s newly agreed upon decision to not lay pressure on the ECB anymore she also stresses the bank’s independence. What she stresses – little surprisingly – are automated actions against states in infraction of debt rules, these procedures should be controlled by the Commission or the ECJ. Merkel once again stresses that Eurobonds are not a viable solution right now (‘Euro-Bonds [können] jetzt nicht als Rettungsmaßnahme gegen die Krise eingesetzt werden’). She wants to empower the ECJ to allow it to take cases because of infractions against the debt rules. More generally she wants to create a -n ill-defined – Stability and Fiscal Union, including a strong ESM and reforms of labor laws in some member states. Does that mean her proposed treaty changes include labor and maybe social policy transfer to the European level, at least partly? She makes clear that the treaties need to be changed either within the EU 27 or within the Eurozone if not possible otherwise.

Last but most definitely not least, here is arguably the most important speech of last week (at least in the short term). Mario Draghi’s, the President of the ECB, statement in front of an apparently almost empty European Parliament. Draghi interestingly enough stressed the ECB’s goal ‘of maintaining price stability […] in either direction‘ and as applied to ‘both the setting of official interest rates and the implementation of non-standard measures‘. Will the ECB increase its – non-sterilized – intervention then? Secondary Market Purchases (SMP) 3.0? Draghi also calls for ‘fiscal compact‘ as the ‘most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration.’ He then answers to critics wondering how such a ‘longer-term vision can be helpful in the short term‘ by telling them that ‘other elements might follow‘. Ever greater, monetary expansionary union?

So what are we left with then? Sarkozy and Merkel are preparing treaty changes – intergovernmental one, much more federalist the other. Both are stressing the independence of the ECB, Sarkozy with the explicit hope of it intervening massively, Merkel – as insinuated by the opposition – only praying for it at night. Sarkozy wants more solidarity (Eurobonds!), Merkel believes they are the wrong solution as of this moment. Sarkozy wants to move ahead with tighter – again: inter-governmental – economic governance within the Eurozone, Merkel prefers treaty change for the EU 27 or at least with an opt-in for everybody interested (Poland! Sweden?). Lots of issues to work out before Monday’s episode of Merkozy running Europe. The German opposition wants the EFSF to become a bank, Hollande is looking for a European investment program based on Eurobonds – I think we can safely ignore both of these for the time being, the latter more so than the former. Sikorski is practically begging the Germans to finally put an end to this crisis, while effectively calling for a federation of Europe. Draghi, finally, hints at ECB intervention once a ‘fiscal compact‘ is underway.

It’ll be an interesting week once more to say the least.