Rest of the world says ‘nein, danke’ to euro bailout
The European Financial Stability Fund (EFSF), the embryonic bazooka that will save the world economy and the eurozone and Italy and Spain, has just released fuller results from its auction this week on behalf of Ireland.
And I think the colourful charts make for grim reading.
If you want a quick primer on how it works, see my report from when I visited their offices in Luxembourg last month. It includes fridge magnets from Abu Dhabi, Beijing, Moscow, that the EFSF staff collect on their travels to sell the bailout fund’s bonds to wealth eastern investors.
You’ll remember that the debate in Europe is how to turn 440bn euros into 1 or 2 trillion euros to make the bailout facility “bazooka-sized” for use if Italy or Spain disappear into the bond market Bermuda triangle.
There are a couple of types of financial wizardry they hope to use to do that. All involve attracting foreign investors to “leverage” the firepower. But there’s a big big problem. There is no pot of cash for the original core 440bn euros. This requires the same foreign investors to lend on money on the back of legal guarantees from the eurozone’s AAA nations, basically Germany and France. Forget about the trillions, can the EFSF even get the 440bn euros?
My faith in that was tested by those pie charts. The auction on Monday, as I have said, barely raised the 3bn euros sought for Ireland. The first in January auction had 44.5bn euros for 5bn euros of loans, nine times oversubscribed. But there has been a structural change in the pattern of who bought the EFSF bonds. The much lauded Asian investors HAD been picking up 40-46 per cent of the first three EFSF auctions. Monday’s Ireland auction – just 23 per cent.
Jin Luqin, the head of the Chinese sovereign wealth fund, was not joking to me a fortnight ago, when he dropped some heavy hints as to China’s scepticism.
There’s also been a drop in funding from the US, but Britain’s funding has increased. British investors soaked up 14 per cent of Ireland’s EFSF bonds this week , versus 5 per cent in the last auction in June, and 11 per cent for the first Irish auction. Middle Eastern investors, presumably sovereign wealth funds, kept their hand steady taking 6 per cent of the funds.
Talking of sovereign wealth funds, the first three EFSF bond issues saw 44 per cent, 37 per cent, and 54 per cent of the funds supplied by sovereign wealth, governments or central banks. This week, it was just 32 per cent, compared to a majority of the money for the last issue.
So it seems like a structural change. The proportion funded by fund managers fell to its lowest level too. In Jan: 26 per cent, June15: 28 per cent, June22: 18 per cent. Now, just 13 per cent.
Who made up the slack? Banks, insurance and pension funds, presumably from the eurozone and from the rest of Europe, including Britain.
A final graph:
Europe itself had to fund 69 per cent of the EFSF Ireland two auction, compared with 46 per cent at the last auction.
The world is voting with its feet.
How on earth are they going to leverage this up to save Rome, when the 440bn euros is proving hard enough?
There’s only one answer: Frankfurt. Printing presses. The sooner Germany realises this, the better.
PS: Here is my explainer from last night as to why 440bn euros is not enough.
You can follow Faisal Islam on Twitter @faisalislam