Comments on Eurozone crisis

Silvio Berlusconi quits as PM

Why Monday Is Going To Be A Huge Day For The Eurozone Crisis

Business Insider,

12 November, 2011

Berlusconi is gone. No doubt, world leaders across Europe are busting open the prosecco, cheering alongside the people on the streets of Italy.

But of course there's no great reason to think that the next PM of Italy (likely Mario Monti) will be much better at enacting reforms, or that any said reforms will keep the bond wolves at bay.

No, what we're going to be watching on Monday is whether the ECB -- lead of course by Italian Mario Draghi -- will seriously jump into the market and suppress Italian yields. We're not talking about a bond buying program, we're talking about explicit yield suppression.

We've been talking about this possibility of a Monday intervention for the past few days, starting with the huge interest rate spiral back on Wednesday.

Now with Silvio gone, that theory will be put to the test.

If the ECB gets in, it will be the first game-changer of the whole crisis. If the ECB waits it out, or only nibbles on some more Italian debt, it might even be worse than the status quo, since it will confirm that even with major changes in leadership, the ECB just doesn't want to do its part.

EFSF Bail-Out Fund Buys Its Own Debt Because Not Enough Others Will

Mish’s Global Economic Analysis

12 November, 2011

To raise "bailout" money the EFSF sells bonds. In its first auction after the new Merkozy agreement, not enough investors wanted the garbage and the fund ended up buying some of its own bonds.

The Telegraph reports Eurozone bail-out fund has to resort to buying its own debt

The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland.

However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds.

Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.

The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted.

Bizarre Setup

The EFSF raises money by selling bonds that few investors want. So it buys its own debt effectively raising no cash. Is this supposed to work?

Given there are still no terms on the EFSF debt, agreements on leverage, amount of guarantees, etc., the amazing thing is not that the EFSF had to buy some of its debt, but rather anyone else was interested at all.

This helps explain why the IMF went on a tour of Russia and China begging them to buy the garbage. No one else wants it, and the EFSF suspected as much in advance.

For details on the IMF dog-and-pony show in Asia, please see World has Major Funding Gap; IMF Begs Russia and China for Money; Italy and Greece Demand Deposits Collapse; Run on Greek Banks?