October 26, 2011
Not long ago, European governments were blasting the financial products which contributed to the 2008 meltdown. Now, in an attempt to save the common currency, they are turning to those methods themselves. They have become no less dangerous in the intervening years.
It was one of the central lessons of the 2008 financial crisis: Banks and their customers, so went the political consensus, should only invest in products that they were able to understand. That meant that banks should stay away from special purpose vehicles and structured products that used finance tricks to transform questionable debt into sure-fire investments.
That was then. Now, however, just three years later, the tune has changed dramatically. Indeed, it isn't the banks that are eagerly developing new products in an effort to transform large sums of money into even larger mountains of cash. It is the politicians themselves.
At issue is the euro bailout fund known as the European Financial Security Facility (EFSF) which is the focus of a critical European Union summit on Wednesday evening in Brussels. The fund is designed to provide needed funding to heavily indebted euro-zone member states, prop up wobbling European banks and buy sovereign bonds of struggling countries to help keep risk premiums as low as possible. But it's not big enough. With a lending capacity of €440 billion -- backed by €779 billion in guarantees -- the EFSF would be insufficient should Italy or Spain run into trouble.
The German parliament will vote on Wednesday on whether to allow Chancellor Angela Merkel to approve a leveraging of the fund to boost its effectiveness to up to €1 trillion. A test vote on Tuesday indicated that passage of the measure is assured, with just 11 rebels among coalition parliamentarians and broad opposition support.
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