But Who The Heck Is Going To Do All The Bailing Out?

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).

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  10 comments for “But Who The Heck Is Going To Do All The Bailing Out?

  1. Blankfiend says:

    Hi Wolf,
    I am becoming seriously concerned about Germany with regard to the seeming disconnect between the widely reported growing discontent with the Euro amongst the population and the mainstream political parties' continued support thereof. Given the massive potential obligations to which German politicians would have to commit their citizenry in order to keep the EMU alive, either (1) the populace is going to have to acquiesce, OR (2) German politicians are going to have to adopt a more nationalistic approach, OR (3) the stage is going to be set for a much more radical (think Sonnenrad) political alternative to emerge, as it was 80 years ago.

  2. Wolf Richter says:

    Hi Blank,
    Good points. This will be interesting to watch.

    I see evidence that the bailout controversy will be a topic in the next election (for the first time). Merkel is still very popular, but she is feeling the pressure. Germans are largely happy because of their economy is doing well, still. But they're getting worried.

    I don't think radicalism will take over. I think there will be heated public discussions – and if the economy slows down seriously, the discussion might take on more anti-bailout urgency. But in the end, the population might, as you said, acquiesce. Just like we acquiesced when the bailouts happened (Fed and TARP).

    What surprises me is that there is NO public discussion in France, but they're in the same boat.

  3. Thomas Brey says:

    Hi Wolf,

    found your blog a couple of weeks ago, great reading, thank you very much. I am a German and I am just horrified about both the looming disaster as well as the apparent ignorance / nonchalance even among educated people (I am a graduate working in natural sciences). But you are right, the French people are even more ignorant. Could it be that the know well enough that, when push comes to shove, they will be at the receiving end of the bailout frenzy anyway?
    By the way, even if you do not speak German, this blog <http://www.querschuesse.de/&gt; provides good information on financial and economic developments in Europe

    Regards, tb

  4. Wolf Richter says:

    Hi Thomas,
    Thanks for the link. Nice blog. I'll keep an eye on it (yes, I do speak German plus French and Spanish).

    If the French think that they could get bailed out by Germany, they're not thinking. Germany isn't that big. However, they (and others) might get bailed out by the ECB or the ESM if the appropriate treaty changes are made. It may start with a "banking license" for the ESM. There might be other bailout tricks that would be harder to implement due to popular opposition in Germany (Eurobonds, for example). But politicians will try.

    I'm always looking for interesting, boots-on-the-ground info and good links. If you have something of interest, send it to me via a comment (as you just did) or via the "Contact" tab.

  5. @Thomas Brey:
    Thanks for the link. Google's 'Translate' for Chrome converts it for my English eyes.

  6. Blankfiend says:

    "What surprises me is that there is NO public discussion in France, but they're in the same boat"

    Seems to me that the French are trying their hardest to keep their heads below the parapet, with the knowledge that the snipers are zeroed in and waiting.

  7. Janeb says:

    Who will do the bailing out? The money printing ECB just like the FED in the US…. Actually the sucker savers and taxpayers via inflation.
    Nothing new under the sun.

  8. Digby says:

    Thanks for explaining it so well.

    I always wondered where all this money comes from.

    Now I understand it.

    As you say they have no money they are borrowing it from each other !

  9. money says:

    shcuable will go along with it,if he knows there is arbitrage that can be made for them( germany) even as he is still on the hook at PBOC (who will do the exact same thing)… the default is actually being perputrated on the whole of the mass,s around the world (70% footing the bill,for the other 30 %s lifestyle and management fee of the said mass,s)….. rumuors are there is a ton of credit that,s been in the shadow,s (most likely middle eastern,petrodollar generated credit) of which some might become availible soon enough…… otherwise, schuable needs to cough it up(which cleans him out), go DM, seizeure of @site, or just plain yelling out for help….. sad,sad,sad

  10. Jim Beale says:

    The funniest thing is that, as countries get bailed out, they are more-or-less shut out of the bond market because of onerous rates. But, in order to continue to contribute to the EFSF or ESM they will have to borrow money at (say) 7% in order to loan it out at 3%. Wow, that's just stupidity.

Comments are closed.