Euro-zone Update(1): EFSF Reform, Size and the Causes of Recent Turbulence

In the spirit of this post, and as the first entry to this blog’s “Eurozone Update”, I call the reader’s attention to this post by Jean Quatremer, where he describes the French and the German positions on the details of the upcoming permanent version of the EFSF. The Germans apparently want the granting of assistance to every country seeking the support of the EFSF to automatically be conditional on them undertaking debt restructuring. Fortunately, and only according to that article, the French seem to oppose that idea, favouring instead an approach closer to that of the IMF, which has only supported debt restructuring in about 30% of it’s interventions and apparently only in cases of dubious solvency rather than liquidity. A lot of ink has flowed in order to cover this debate, most of which I believe was misguided. The general consensus seems to be that the present Irish crisis was the result of a Franco-German agreement about the need for burden-sharing by the private sector for future EFSF interventions, in the form of restructuring of the sovereign debts of countries accessing that fund. This may have ended up being the case, but it does not seem to, at least initially, have been the case, as the WSJ points out in this rather unnoticed article. According to it, the cause of the present crisis was internal Market turmoil rather than renewed long term fears about the solvency of these states. As evidence, the article points to the fact that the biggest rise was on two year debt yields, not on 10 years ones. Nonetheless, now everyone blames Merkel and Sarkozy and by the laws of the market that means it is true.
In a parallel note to these franco-german led EU debates the President of the Bundesbank, Axel Weber, has argued that the EFSF could be increased by an extra €100B. This comment came in the background of similar reassuring comments by Klaus Regling (the EFSF chief), and by Wolfgang Schäuble, the German Finance Minister. So it’s good to know we have enough virtual/guaranteed funds, but the uncertainty of the long term future of that tool seems to be making markets iffy.

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