Thursday, December 8, 2011

Europe’s Question Mark

By Robert Romano
Europe has absolutely no idea how it is going to get itself out of its current predicament, as evidenced by a wide range of proposals now under consideration to bail out banks that bet poorly on the debts of Greece, Italy, and other troubled sovereigns.

Chief among the proposals would be ratification of the European Stability Mechanism (ESM), a new treaty that would host a €500 billion permanent bailout fund intended to perpetually refinance European debt should the need arise.

This new fund would exist alongside the current €440 billion European Financial Stability Facility (EFSF), even though ESM was originally intended to replace the “temporary” EFSF. The trouble with the original is that there’s only about €250 billion left, not enough to even help Italy refinance €400 billion of debt coming due next year. 

All together, Portugal, Italy, Ireland, Greece, and Spain (PIIGS) have over €3 trillion of consolidated debts, and it is thought that the only way to contain the crisis — restoring investor confidence in the debts — is for somebody to guarantee every bit of that.

So far, the European Central Bank (ECB) has bought about €200 billion of PIIGS debt on secondary markets, although it is said it has a natural limit of about €300 billion that it is fast approaching. The bank is prohibited from making direct purchases by the Lisbon Treaty, making it an unsuitable candidate to carry forth the bailout on its own.

For its part, the International Monetary Fund has thus far provided €78.5 billion to prop up Portugal, Greece, and Ireland, and has about €290 billion left to lend.
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