Quick! More sandbags (filled with cash)

Economist
November 4, 2011

The Beachfront of Cannes is deserted. The streets are still. The city is quiet, apart from the rumbling of journalists pulling their rolling bags and motorcades whisking G20 leaders to and from their hotels.

One can almost hear the scraping of shovels as European leaders rushed to fill the sandbags in the hope of surviving the impending explosion in Greece, perhaps followed by Italy (see earlier post).

What they need is bags and bags of money to strengthen the existing rescue fund, the European Financial Stability Facility (EFSF). But there is no more cash to be had, so it must be conjured up through financial engineering.

European leaders claimed at their last summit that the EFSF would be expanded to €1 trillion, but this never seemed adequate, while legal and political problems are hampering progress. “There are some creative solutions,” is all one person close to the discussions would say, expressing doubt that it could be concluded by the end of November. This is uncomfortably close to the mid-December moment when Greece runs out of money and, unless it receives more money, must default.

One source of extra money might be the IMF, which helps to explain why Barack Obama joined European leaders for crisis talks last night. The fund can only lend to states, rather than buy bonds on the markets, as the revamped EFSF is intended to do.

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