Europe’s € 500 BILLION Quasi-Quantitative Easing

Europe’s EUR500 Billion Quasi-Quantitative Easing (ZeroHedge, June 12, 2013):

Submitted by Mark J. Grant, author of Out of the Box, Five Eurozone countries now have loans for half a trillion Euros.

These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. On top of that are the emergency loans from the International Monetary fund (IMF) and bilateral loans from the solvent countries to the bankrupt nations.

Cyprus is set to receive 9 billion Euros from the bailout fund

The European Stability Mechanism (ESM) will transfer the first 3 billion Euros of the agreed 9 billion Euros to Cyprus this month. The ESM, the permanent bailout fund of the euro currency union, bears the brunt of this most recent bailout. Cyprus will receive another 1 billion Euros from the International Monetary fund. Cyprus, as of now, has financial obligations totaling 23 billion Euros. The odds are that soon they will line up for more.

Greece is currently on the hook for 243 billion Euros.

With several mismanaged bailouts, the European Union, various individual countries and the IMF have obligated themselves to Greece for 243 billion Euros. This bailout is being handled by the European Financial Stability Facility (EFSF), the temporary predecessor to the permanent ESM. According to the European Commission, the EFSF bailout fund has so far paid out 116 billion Euros, with 28 billion Euros still to be paid. To date, the IMF has paid out 20 billion Euros. The current rescue program is scheduled to be completed by the end of 2014. By 2020, Greece is projected by the EU/ECB and the IMF to reach a level of debt that is considered sustainable. These projections are a mockery of common sense.

It is going to have to be debt forgiveness, additional capital or a combination of these two schemes which will be required for Greece to be able to pay their debts. Given the continuing deterioration of the Greek economy it is impossible for Greece to finance their current debts. I predict the country is going to go bankrupt again before this botched process is completed.

Ireland has given 85 billion Euros to rescue its banks

The rescue program for Ireland expires at the end of 2013 at which point the country is hoped to be able to raise capital on financial markets again. Of the 85 billion Euros required to put its troubled banking sector, Ireland has raised 17.5 billion Euros itself from state assets and pensions. Of the remaining 67.5 billion Euros, 22.5 billion is coming from national funds of all EU member states, 12.8 billion from the EFSF bailout fund, 20 billion from the IMF and 3.8 billion from a loan from the United Kingdom. Whether Ireland will be able to sustain itself is a 50/50 proposition, given their economic numbers, regardless of all of the hype that is spread around by the EU.

Portugal is obligated for 78 billion Euros.

The approved 78 billion Euros is currently impossible for Portugal to pay unless their economy improves dramatically which I would not count on. The loan program for Portugal expires at the end of 2014. Portugal has received more than 60 billion Euros from the rescue program to date. The pledges are evenly distributed among the EFSF, the EU and the IMF, at about 26 billion Euros.

Spain went bankrupt but the money was loaned to their banks.

Spain, in fact, hit the skids but the EU and the IMF did not want to admit the problem. They feared that any sort of stability in the Eurozone might crack. To create a charade the Troika then lent money to the Spanish banks which then lent money to the sovereign. This also hid the real debt to GDP ratio for Spain which does not have to count contingent liabilities as part of their balance sheet. One hundred billion Euros from the ESM bailout fund has been pledged to the Spanish banks in this fantasy.  Spain has so far taken about 41 billion Euros of the available 100 billion Euros. The government of Spain is liable, however, for this debt.

The Convoluted Rescue Funds

Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. Not all of this money has been paid in to the funds however and it is another case of contingent liabilities that are not counted towards the debt to GDP ratios of Germany, France and Italy. The rescue funds have now distributed 205 billion Euros, of which the EFSF has provided 155 billion Euros and the ESM 50 billion Euros.

The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. Again, none of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public.

As we near the end of these programs there are a number of new factors that are coming into play. Various governments no longer have the political will to lend their citizen’s money to other troubled nations. Cyprus was a severely botched process where 90% of bank depositor’s money is now tied up in worthless bank equity, the confiscation of funds and the freezing of the balance.

There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors. Since Cyprus and Greece involved the minimization of the due process of law I would say that the ownership of Eurozone bonds is far riskier than owning American credits. Yields have gone down as caused by the various forms of Quantitative Easing and the liquidity that has been provided but the risks remain. To not identify them may prove to be a very costly mistake.

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