Leveraging the EFSF

by on September 30, 2011 at 5:55 am in Economics | Permalink

I’ll repeat this link for background.  I would feel better about the idea if the context were: “We can always go back to the trough, but leveraging the fund is the easiest way for us to strike quickly and decisively.”  Instead I see too much of: “We can’t get any more from our taxpayers, so we’d better stretch this one as far as we can.”  That’s just inviting the speculators to set up camp against you.

Who will fund the leverage?  BRICS?  American investors?  Ultimately other Europeans?  All of those parties already can construct their own leveraged positions in Italian government debt, if they wish.  So presumably the leverage will be a hidden subsidy to the financiers, one way or another, to get them to participate.  Subsidizing the debt buyers, rather than guaranteeing the debt (admittedly that may be impossible and undesirable for Germany), hardly seems like the way to go.  You bear the costs of the bailout without any assurance it will work.

This German-language video suggests many of the German representatives do not know what they just voted for.

You’ll find lots of good comments on Twitter, and here.  How about this take?:

“Germany voted for the EFSF extension. Greece celebrated by going on strike.”

londenio September 30, 2011 at 6:03 am

The video is very telling. It is sort of consistent with the idea often seen around this site that politics is mostly about affiliation. The vote was about Merkel and a general position, not details.

Adrian Ratnapala September 30, 2011 at 10:04 am

You are probably right that this is a universal truth, but parliamentary systems have a special talent for it. The reason those systems work the way they do is that 95% of the time, party members just do as they are told. I suspect American legislators would present more of their own opinions, even if they were based on as little or less knowledge.

john haskell September 30, 2011 at 6:56 am

So long as the Sun rises in the East, there will be someone telling us that Italians’ unwillingness to buy their own government’s bonds is due to “speculators.”

David R September 30, 2011 at 8:29 am

Great quote, in one sentence it sums up the European situation.

j r September 30, 2011 at 9:55 am

Slightly OT, but if there’s anyone more insufferable than Krugman, it’s Nouriel Roubini

Bill September 30, 2011 at 11:50 am

Roubini is a realist.

msgkings September 30, 2011 at 1:05 pm

Roubini is a clock stopped at ‘disaster iminent’. So he’s right every decade or so.

Peter Schaeffer September 30, 2011 at 2:00 pm


I have been following N. Roubini since I first heard of him back in 2005. He has proven to be far more right than wrong. He called the U.S. crash rather well. Of course, he saw a currency crisis in the offing rather than a bank crisis. Still, that puts him in the ionosphere compared to most U.S. economists (but not all). He was also talking about the coming Euro crisis in 2005. Yes, he targeted Italy rather than Greece. However, he the brains to see it coming. A few links should help

“You are independent of all logic Giulio Tremonti!” (http://bit.ly/nDNypX)
“Italy’s Tremonti’s Temper Tantrums on EMU in Davos…a Sad Embarrassing Episode for Italy…” (http://bit.ly/oXkQtq)
“What Happens if Italy Dumps EMU and the Euro? Devaluation, Default and Lira-lization of Euro Debts!” (http://bit.ly/nSjPUo)
“The “Game of Chicken” (or Roosters?) between the ECB and the EU fiscal authorities..and how will Bernanke deal with the US fiscal time bomb?” (http://bit.ly/rjKsDO)

Peter Schaeffer September 30, 2011 at 2:10 pm


For an example of some real ignorance, check out “Current Account Fact and Fiction” by David Backus, Espen Henriksen, Frederic Lambert, and Chris Telmer.

“We suggest instead that things are fine: although national saving is low, the ratios of household and consolidated net worth to GDP remain high.”

This paper was written in 2005/6, just about the same time that Roubini was sounding alarms about the U.S. and the Euro.

Tom September 30, 2011 at 11:03 pm

Peter, this the time of Greenspan’s irrational exuberance speech. People did see it coming, that’s why you started to hear about Roubini. He has predicted 10 of the last 3 recessions.

Evan September 30, 2011 at 12:53 pm

Seriously Tyler, how many languages do you speak?

Pat MacAuley September 30, 2011 at 1:41 pm

Public opinion surveys are emphatic: German voters don’t want to make more Euroloans to Greece, and Greek voters don’t want Greece to accept the loan conditions. So both governments go ahead anyway. Is this democracy at work? It’s pretty obvious that this will end badly.

prior_approval September 30, 2011 at 11:31 pm

Actually, it is democracy at work – the representative version, at least. One should note that the only (even marginally respectable) party that attempted an (admittedly not believable) anti-euro position in a German election was crushed – there simply is not a group of German voters that put their feelings about the euro/crisis response (a bank was more or less nationalized here, after all, and the shareholders felt they were stiffed because of how the government acted – again, the only party that opposed this in any sense was the same FDP as above) above other concerns.

And yes, that really is how democracy works, a messily imperfect system who like all currencies, has a definite life span.

prior_approval September 30, 2011 at 11:22 pm

Austria committed funds, but banned leverage as a tool for those funds.

The EU makes decisions – nations implement them. Or not, as the case may be – it is a messy process.

In the end, I just expect promised funds that may not later appear in the EFSF to be forgotten about, much like the idea of leveraging them. Empty promises remain just that.

As for going out on strike – lots like the regional transit systems in this part of Germany will be facing strikes (again – happens with the contract phase, where the union needs to demonstrate who actually does the work, while the transit companies demonstrate their firmness is holding costs down). Strikes are how workers demonstrate their power in an economy that requires their labor. Or at least hold on to their share of the wealth they create. Of course, Greece was a fairly brutal dictatorship a generation ago (supported by the U.S.), and part of how it was brought down involved protesting.

There is more than one type of euro contagion that concerns a certain class of American.

kapitalmarktdirekt October 3, 2011 at 11:47 am

Indeed many German representatives seem not fully understand for what they were voting for. Can´t blame them. Nobody really seems to know how the EFSF design will work [or not]. Merkel is in the funny situation that she has to take the lead forcing Greece to become competitive while not allowing them to get too much leeway too early. The probably would stop immediatly to execute the necessary reforms. Which they should have tackled long ago.

And she has to live with being blamed for all things Greece didn´t take care of itself in the last 20 years. Greece main problem is really competitiveness. Efficiency and productivity are what they need to fix. But the Greek political elite loves relying on Merkel in that blame game.

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