EFSF ideas

When in 2008 the world almost came to an end, most politicians were very quick in apportioning blame on the bad practices of banks, the lack of regulation and the greediness of the investment bankers. They pointed out that the practice of moving assets to SIVs and SPV’s off balance-sheet in order to hide the leverage was detrimental to the world’s financial health. These SIV’s had the following characteristics:

1)    Had little capital compared to the assets they were holding

2)    They financed the assets by issuing paper (mainly short term)

3)    Because of the collateral, they were given AAA status by the rating agencies

4)    Had liquidity provision lines back to the mother company (which was eventually called, causing the credit crunch)

So when the price and quality of the assets (mainly mortgages) went down, investors stopped buying the SIV’s bonds. The result was a huge shortfall of funding. As they were not banks but offshore entities (so called “Grey or Shadow banking”) they did not have access to the unlimited provision of ECB or FED money. Feeling desperate they went back and activated the liquidity provisions they had with the mother company. This in turn caused the credit crunch and the global crisis.

Now move fast forward to 2011 and look at the proposal for saving Europe.

1)    Establish a European SPV (or transform EFSF) with 50billion (say) of capital

2)    Give it the status of a banking institution

3)    Leverage it 20 times or more to 1 trillion by issuing bonds into the market

4)    Use the proceeds to buy Peripheral debt and/or bad bank assets.

We do not know whether the plan involves short term or long-term bonds. The difference between this new SPV and the previous one is that it would no longer be a “Shadow banking”, as it would have access to the unlimited funding of the ECB. This is the mother of all leveraged SIV’s. It actually transfers the financial technology that was responsible for the credit crunch to the sovereigns and to the real banking system. If the quality of the bonds this SPV owns, goes down, there would be no problem in funding them forever, assuming the accommodative ECB stance is forever. The whole scheme is a stealth way of printing money without the ECB violating article 21 (grey area). I don’t understand why we have to complicate these things. We do not need SPV’s, just ask the local banks (Italian, Greek, Irish etc) to buy more new Government debt and then repo it with the ECB. Even better, ask the local NCB to increase the ELA (Emergency Liquidity) to 1trillion. In fact this is the real onshore “Shadow Banking”. The ELA has the ability to finance any kind of toxic asset by “Ponzi-ing” it with the state. The Irish are doing it for a year now. Why not extend the practice across all Europe?

Alternative ELA Proposal

Let the Greek banks give tax-loans to the Greek retail customers. In other words, loans for the Greeks to pay their government’s Taliban tax raids. The lender bank can turn around and give these loans to the Bank of Greece’s ELA and get the funding. Doing so the Greece collects all the taxes and appears perfect in Troika’s eyes. The fact that the ELA is a liability of the Greek state is a minor detail that can conveniently be overlooked for some time. 

These new proposals are just a covert way of introducing more leverage to the already overleveraged banks and governments by placing smokescreens and printers. It is just another sleight of hand to distort reality and buy some time.