Wall Street Journal
March 28, 2011
Groucho Marx once asked, "Who are you going to believe, me or your own eyes?" The euro-zone leaders' variant is to ask those who question their triumphant post-meeting announcements, "Who are going to believe, what we tell you, or what you can plainly see is the truth?"
Consider last week's announcement that the new European Stability Mechanism will have lending capacity of €500 billion ($704 billion). A tidy sum, it seems. Let's break it down. The ESM will need €700 billion in order to borrow the €500 billion that will constitute its lending capacity. That's because creditors want a margin if they are to lend to the ESM at low rates, just in case some of the guarantors prove less than reliable. The ESM claims to have €80 billion in paid-in capital, but in fact, only €16 billion will be readily to hand, since the €80 billion will be paid in over five years, barring of course any governments willing to renege on their legal commitments. That leaves €620 billion of "committed callable capital" to be raised.
Greece and Ireland combined will cough up or guarantee €31 billion. That's right—the two countries that are on euro-zone life support. Portugal, soon to join them, is expected to contribute €18 billion. Spain, although doing a bit better, is exposed to €77 billion of Portuguese debt, the credit ratings of 30 of its banks have just been downgraded, and so remains in the sights of the bond vigilantes: It is counted on for €83 billion. Belgium, its credit standing already being questioned because of its governmental chaos and high deficit, is to drop a cool €24 billion into the collection box in cash and guarantees, and Italy, hardly the gold standard of sovereign debtors, another €125 billion.
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