Financial Times
October 19, 2011
As this weekend’s eurozone summit looms into view, the key question for markets is whether the new financing arrangements will be sufficient to handle three separate problems: the necessary writedown of Greek debt; the recapitalisation of eurozone banks; and the restoration of private funding for Italian and Spanish budget deficits.
It has been clear for a long while that the €440bn currently available to the European financial stability facility is far from sufficient to do the job. Consequently, it seems that the summit will agree to “leverage” the bail-out fund to give it much greater scale. This has triggered optimistic talk about a “big bazooka”, but achieving the right order of magnitude still looks to be a very tall order.
Unfortunately, the three problems that the EFSF needs to handle are interrelated. Financing the future needs of Greece, Ireland and Portugal is likely to absorb around €100bn of the fund’s resources. The recapitalisation of eurozone banks will need at least €200bn in total. It would surely be prudent to assume that the EFSF will need to provide half of this. Finally, the possibility of that the fund would be involved in a potential rescue for Belgium, and other contingencies, must be considered.
This leaves only about €200bn of “free” capital at the EFSF, available for leverage. Anything more than this threatens to undermine the credibility and triple A status of the fund itself.
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