Spain’s big banks are getting bailed out with €100 billion from the bailout fund EFSF. It won’t be enough, but it’ll buy time—a Eurozone mantra. Friday and Sunday, two of Spain’s seventeen heavily indebted regions, Valencia and Murcia, asked for a bailout from the central government. Today, it was Catalonia. Andalusia is still hoping to buy time. Other regions need to be bailed out as well, but the central government can’t bail out anything because it’s broke. It needs a bailout for itself and for its regions. A bailout far larger than any of the prior bailouts. Following the model, it will start with too little and then balloon.
The currently available bailout fund is the EFSF. It has a capacity of €440 billion. €192 billion have been committed to Ireland, Portugal, and Greece; €100 billion to Spain for its banks; and €10 billion may go to tiny Cyprus. Leaves €138 billion for Spain—and the rest of the Eurozone. Peanuts. Hence, the urgency to get the larger ESM off the ground.
In the EFSF, the top four contributors are Germany with 27.06%, France with 20.31%, Italy with 17.86%, and Spain with 11.87%. Combined, they’re responsible for 77.1%. The other 13 Eurozone countries cover 22.9%. As bailed-out Greece, Ireland, and Portugal no longer contribute to the fund, the share of the remaining countries increases. So, the new load on Germany is 29.07% and on France 21.83%—combined over half!
Cyprus requested that it be allowed to step out of the EFSF, like its bailed-out predecessors. Though its contribution amounts to only 0.2%, German Finance Minister Wolfgang Schäuble, the lynchpin in all of this, nixed that request. If Cyprus wants to receive a bailout package, it would have to continue contributing its part to the fund—ironic euro nonsense, until you start thinking about Spain and Italy. If they get bailed out, their share, to be taken up by the remaining 11 Eurozone countries, would jack up Germany’s load to approximately 38% and France’s to 28%, for a combined 66%.
Alas, neither Germany nor France has any money. Every cent will have to be borrowed. The EFSF and the ESM are funded by their members, and by selling bonds. If Spain and Italy crater, 66% of those bonds would be guaranteed by Germany and France. Currently, the costs of borrowing are low for both countries, but once markets see that Germany will have to guarantee and perhaps pay 38% and France 28% of potentially a couple of trillion euros or more—that’s what it would take to bail out Italy—the costs of borrowing are bound to rise. Moody’s downgrade of its outlook on Germany was a hint.
There is a lot of handwringing in Germany about guaranteeing an ever increasing amount of decomposing Eurozone debt. Chancellor Angela Merkel tries to downplay it, but she can’t stifle the noisy grumbling from economists, bloggers, politicians, and even journalists.
But no one has yet explained to the French people what they’re getting into. President François Hollande hasn’t held a press conference on the huge tab. Bank of France Governor Christian Noyer hasn’t sounded any alarm bells about the suffocating debt and guarantees the French people are taking on through these bailouts. The government is too busy plowing through its honeymoon, raising taxes, and stepping on PSA Peugeot Citroën that wants to shut some plants to survive in face of double-digit sales declines.
The ESM, ingeniously, has language stipulating that bailed-out countries can’t stop contributing. Hence Schäuble’s refusal to let Cyprus off the hook on the EFSF. No more precedents! And that’s the irony. Germany and France can’t bail out 66% of the six debt-sinner countries, including Spain and Italy—they’re way too large. So language was inserted in the ESM that would force bailed-out countries to remain on the hook. For instance, if the ESM gave Italy €1 trillion—assume that it could do that, and that it would be enough—Italy would have to guarantee and perhaps pay 17.86% of that and Spain 11.87%. But they’re broke. They wouldn’t be able to pay, and their guarantees would be worthless. It’s a black hole.
Instead, Germany and France will end up with 66%, and in a worst-case scenario will have to eat it. People of both countries should be told! They should be reminded that these numbers get worse as more bailout candidates make the list. But that’s just theoretical. In reality, those funds can’t bail out Italy; its debt is too large. If Italy goes, so does the Eurozone—or the ECB will be tasked with printing whatever it takes (PWIT).