Friday, November 04, 2011
The EFSF Deal is a Joke: Europe is Broke
One of the key items that few investors seem to be focusing on is the fact that while the system is awash with liquidity, there is very little capital available. Indeed, the great irony of central bank policies in the post-2008 era is that despite flooding the system with cheap easy money, they've not actually done anything to lower leverage or raise capital.
Case in point, the European Financial Stability Facility (EFSF) which is supposed to be the ultimate backstop for the European banking system, is in fact nothing more than a super-leveraged investment vehicle backstopped by bankrupt nations.
In plain terms, certain less insolvent nations (Germany and France) are supposed to bail out more insolvent nations such as Greece and Ireland. Common sense tells us this can't possibly work.
The EFSF is supposedly going to raise 1 trillion Euros... in an environment in which it struggles to even stage a five billion Euro bond offering? Give me a break.Again, while the system is flooded with liquidity, actual capital that can be put to use is virtually non-existent. The entire financial system is built up on leverage and easy credit, NOT capital.
This is why the bailouts cannot work. You cannot solve a leverage problem with more cheap debt. Just look at Greece. That whole mess started in January 2010... two bailouts and a number of write-downs later the country is still broke.
And somehow this policy is going to work for other countries such as Italy or Spain? Give me a break. The Euro in its current form is finished. The credit markets are already pricing in more Greek defaults. And Italy's now lurching towards its own default.
Ignore stocks, they're ALWAYS the last to "get it." The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.
Labels: Euro default, Greece, money, rescue
