by Richard Barley
Wall Street Journal
October 19, 2011
Here we go again. In 2010, European leaders hoped the creation of the €440 billion ($605.14 billion) European Financial Stability Facility alone would restore confidence to government-bond markets. They were swiftly disabused. Now, without adding any money, they are hoping magically to use the EFSF as a quasi-insurance scheme to back bonds issued by shaky European nations. This may be another false hope.
The idea is superficially attractive. The EFSF isn't big enough to stabilize bigger nations such as Spain and Italy, if required. But it is politically difficult for governments to increase its size. So, using a first-loss insurance scheme or a collateralized version of it to adhere to European rules, €440 billion can theoretically be stretched to a far higher face value. Crucially, by covering newly issued bonds, it might help Spain and Italy retain access to government-bond markets.
But the reality is trickier. Not only does the still fluid plan serve as a reminder of complexity of getting changes through European legal hoops. But the EFSF already has commitments to Ireland, Portugal and Greece, and may yet have to help finance bank recapitalizations. That could shrink the amount available to perhaps €250 billion.
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