Portfolio: Explaining Europe's Bailout Strategies
Video Transcript:
Analyst Marko Papic examines the strategies at Europe's disposal to manage its ongoing debt crisis.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
The European Union has raised 4.75 billion euros on May 24 for both Ireland and Portugal via a bond sale. The bond sale was executed by the European Commission on behalf of the EU member states via what is known as the European Financial Stabilization Mechanism, or the EFSM.
The EFSM is the lesser known of the two bailout funds that the European Union has set up to deal with the ongoing European sovereign debt crisis. The 60 billion euro EFSM is coordinated by the European Commission, and the European Commission essentially acts as a member state financial authority conducting bond sales -- bond auctions -- via which it raises the necessary funding that then goes to the peripheral eurozone member states that need it. The 440 billion [euro] European Financial Stability [Facility], the EFSF, is headquartered in Luxembourg as a completely independent financial institution that does not have anything to do directly with either the European Commission or the EU bureaucracy -- it's almost essentially an offshore bank. Of the 440 billion euros worth of member state guarantees that the EFSF is made up of, about 250 billion euros are available to lend to various troubled member states.
The EFSF is the larger and the more well known bailout mechanism. However, it has been the EFSM that has been more active in terms of bond auctions. There have been three bond auctions thus far: In the beginning of the year, the [EFSM] tapped the markets in January for a five-year, 5 billion euro bond; then, in March, it tapped the markets again for a seven-year, 4.6 billion euro bond; and finally, on Tuesday, it went to the markets and issued a 10-year, 4.75 billion euro bond. All three bond auctions produced considerable interest from investors, which illustrates that investors and markets are very much interested and have confidence in the bonds issued by the European bailout authorities. Furthermore, the costs of the lending are relatively cheap. The 440 billion euro EFSF has thus far only tapped the markets once and that was also at the beginning of the year in January for a 5 billion euro, five-year bond.
The idea behind both bailout mechanisms is that they would sequester the peripheral countries in trouble from the international markets, allowing them -- giving them time -- to undergo austerity measures and cut their budget deficits. That said, what is really interesting about both bailout mechanisms is that their legality is very much in question. But what's really important is that the Europeans, who often have struggled over issues of legality and other issues, when confronted with existential threats to the eurozone have completely chosen to sweep the issue under the rug. And this is a very important point for investors because it shows that when it comes to EU treaties and EU laws, the eurozone countries do not intend these to be suicide pacts; they are very much willing to budge and to work on the margins to create such facilities such as the EFSF, which is an offshore bank for all intents and purposes, headquartered in Luxembourg. They have also been willing, for example, to force the European Central Bank to continuously support peripheral eurozone member states by buying their bonds directly in the secondary market or continuing to accept government debt as collateral even when it is downgraded by credit rating agencies. These are all very important mechanisms that Europeans have utilized throughout the crisis, and they have all taken place outside of the bonds envisaged possible by EU treaties.
That said, despite the ingenuity of the supportive mechanisms, there are factors that Europeans don't have control over, specifically the mounting populist angst both in the countries doing the bailing out and the countries being bailed out. And this is something that could potentially scuttle all the plans that thus far have managed to sequester the crisis and at least mitigate it. This is why it is important to continue watching for the evolution of euroskeptic parties in Germany and other core eurozone states as well as the mounting angst among the students, the youth, the unions in the streets of Spain, Greece and other peripheral economies that have been caught up in the storm.
