"European Financial Stability Facility (EFSF) is a private company established by euro area Member States in June 2010. Its aim is to provide financial assistance to euro area Member States to preserve stability in the euro area. Its total effective lending capacity is 440 billion euro. The funding comes from the EFSF's borrowings on financial markets, guaranteed by the shareholders, i.e. euro area Member States." Describing the EFSF as SPV1, one of the two options being considered is to set up a second SPV, call it SPV2, as explained in this official factsheet "Increasing the Imapct of the EFSF": http://www.eucouncilfiles.eu/media/443137/27.10.11-efsf-leveraging-pressfiche.pdf SPV2 would also operate by borrowing money: "The SPV structure would be set up so as to attract a broad class of international public and private investors with different risk/return appetites." with SPV1 in effect indemnifying those "international public and private investors" against losses if SPV2 loses money on its business of "extending loans for bank recapitalisation ... and/or for buying bonds in the primary and secondary market", but with SPV1 only indemnifying the SPV2 investors for consequential losses on their investments up to maybe 20%. As investors are already becoming wary of the bonds issued by SPV1, when it has only borrowed €13 billion so far, how likely is that they'll believe that if they lent SPV2 say €1 trillion to keep Italy, Spain etc afloat, and if/when that bail-out attempt failed SPV2 suffered losses of say €200 billion, nevertheless SPV1 could then borrow €200 billion from investors to make sure that the SPV2 investors were paid on time and in full? And given the 50% losses on Greek bonds, how likely is it that under those circumstances the losses incurred by SPV2 would exceed the 20% guaranteed by SPV1, even if it could borrow enough to meet that guarantee? On the whole I think I'll keep my money in the building society, rather than investing any of it in either SPV1 or SPV2.
Thursday, 27 October 2011
The EFSF "bail-out fund" does not actually have anything like the €440 billion which the media keep describing as its "firepower", its "reserves", its "funds" as Robert Peston pretends here:
The EFSF operates by borrowing money and lending it on.
Its subscribed share capital was minimal - less than €29 million, and I do mean million not billion, as can be checked on page 4 of the Articles of Incorporation:
So far it has borrowed a total of €13 billion through three bond issues as detailed here:
and it has disbursed a total of €9.5 billion as detailed here:
http://www.efsf.europa.eu/about/operations/index.htm
on which basis it will presently have less than €3.5 billion to hand.
It's not an EU body; in fact it's a Special Purpose Vehicle, a private company, as explained in the factsheet available here in this official "FEATURE: European response to the debt crisis":
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