Is this really the plan for the Eurozone?

September 28, 2011 § Leave a comment

Leveraged Stability? Excuse me?

Ilargi: The latest greatest plan to save Europe, or the Eurozone, or the Euro, whichever sounds better, involves taking the present legal authority and financial clout of the EFSF (European Financial Stability Facility), which due to become the ESM (European Stability Mechanism) in 2013, and expand them greatly, something like this (Reuters’ David Lawder and Daniel Flynn quote a “top EU official”):

Europe aims to beef up crisis fund
“We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet” the official said, speaking on condition of anonymity.

Ilargi: You take an X amount of money and then you leverage it by a factor of five and claim it’s actually worth 5X. Something like that. And this in a supra-governmental kind of “fund” (whichever of the two) that carries the term “stability” in its name.

If “leveraged stability” is not already considered an oxymoron, it should and will be from now on in. All these people, from Merkel to Geithner to Lagarde, will tell you that this stuff is aimed at “restoring confidence -in the markets-“. Like the markets don’t understand what happens when €1 becomes €5 at the mere stroke of a keyboard.

Oh, they’ll take it, ain’t nobody don’t appreciate a free lunch, but it does nothing to restore confidence. Quite the opposite. You can’t bribe people into trusting you. The markets know: what the keyboard giveth, the keyboard taketh away.

But we’re to understand that today everyone’s finally in real panic mode, and that breaks all rules and previous promises and -moral- principles. When Tim Geithner goes so far as to suggest bank runs, it’s game on. From the same Reuters piece:

“The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,”Geithner told the IMF.


This is beginning to look like 2008 all over again. Not in terms of causes, but in terms of mechanics and dynamics. System confidence is eroding extremely quickly now, as it becomes clear that solutions are but a bandaid. The bandaid under discussion now, it seems, is to set up a bank that leverages up the investments of European contributors — for the sake of crisis interventions. To save a debt crisis by issuing more debt, in other words. Is this really the plan? Because people won’t see through it?


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