Italy fact of the day

Italy’s guarantees make up 18 per cent of the [EFSF] system.

That’s Italy as guarantee source, not Italy as recipient!  The bottom line is this:

If you double or treble the size of the EFSF without changing its underlying structure,all you do is double or treble the lack of credibility. If you really want to increase the size of the EFSF without destroying it, then you are left with two options: you have to back it through an unlimited guarantee by the ECB, the only organ in the eurozone that is in a position to give such a commitment. Or you have to change the EFSF’s legal status through the adoption of joint and several liability. This means that member states jointly agree everybody’s debt. The two options ultimately mean the same. The liabilities of the system will be shared jointly by all of its participants. If you want to annoy certain people, you could also call the latter a eurobond.

The article, by Wolfgang Münchau, is excellent throughout.


In related news, the EU announced that they intend to plug a power strip into itself, producing an endless source of electric power that will allow them to meet their carbon emissions targets.

Not too shabby. LOL.

In the European situation, I see analogies to firms,.particularly conglomerates. I suspect many private creditors see it the same way. External creditors always want the entire corporate group on the hook for all debts. Generally speaking, the owners make out better if the conglomerate is broken up into its logical pieces, which are more focused. If one happens to have been able to set up a financial structure in which the units are separately funded and not cross guaranteed, that is a windfall for the owners when times get tough. You cut off the allocation of capital to the weaker ones, let them fail and let their creditors take the losses. The external credtiors try hard to convince the owners that there will be a taint on the stronger units if they fail to support the weaker ones. Sometimes executives succumb to this (often because they either fear change, or because they desire the largest possible enterprise to command). But for the owners, breakup is the best way to go normally. The nonGerman nations are like the weaker units of a firm who would love to draw on the surplus generated by the others, and Germany is the strong one that would be better off spinning off on its own. Germany's private sector is the owner, realistically (spare me the Elizabeth Warren argument).

There should be a netting engine for transfers, incoming and outgoing.

At least this lunacy would be efficient.

Musical chairs. By pushing the money around, Italy hopes it will be there for them, when their financial situation goes greasy side up.

Instead of saving the "banks", the separate governments should be publicizing how the depositors at banks are fully insured, so that if a bank fails, all those with deposits will get 100% of their principle back.
Plus interest? Perhaps only the ECB rate of interest?

In Slovakia, banks are only paying about 2% to savers. In the recession, most gov'ts want more spending than saving. But little saving means little tier 1 capital for banks.

The global economy has too many banks and too many bankers, for the amount of "loans to productive businesses" that are being made. Let those who made the worst investment/ speculations fail.

Amen, brother. A 'bank crisis' is when some poor schlep's checks aren't honored because the stupid, corrupt bank doesn't have the cash on hand and won't let the depositors have their funds. The 'bank crisis' is not that the bank didn't get its anticipated rake-off from the ridiculously leveraged bets it made with other people's money.

There are bankruptcy and receivership laws for such crises, and plenty of capacity for demand deposits to be covered. Current fiscal and monetary policy not only raises the barriers to the poor becoming rich; the rich are protected from becoming poor.

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