Chart of the day, Euro bailout edition

October 27, 2011


This, ladies and gentlemen, is how the sausage gets made — it’s yesterday’s eurozone rescue plan, as presented by an unidentified adviser to one of the European Union governments involved in the negotiations.

Frankly, there’s lots of it I don’t understand. (Although the little map of the PIIGS in the top-left-hand corner is clear, and quite adorable.) At the top you have the €440 billion EFSF, with €150 billion already having been spent on those PIIGS. The remaining €250 billion (let’s not worry about these numbers not adding up precisely) gets leveraged, somehow, into €1 trillion — with a special-purpose vehicle in there somewhere for private sector investors to put money into. (The private sector, I’m pretty sure, is represented by that big “PS” box.) The leveraged EFSF then spends its money on the PIIGS as well, with some of that money going to recapitalize banks in those countries.

Meanwhile, the IMF and the Eurozone are also helping out the PIIGS. And Europe’s banks are being recapitalized by June 30, 2012, which will cost €106 billion; it seems that some of that money is coming from the private sector and some of it is coming from the leveraged EFSF. The IMF and the Eurozone are also helping to partially guarantee the new Greek bonds which will go to the banks tendering their old Greek bonds. (I think the tender of the old bonds is that “Greek bonds 100%” line, but I’m unclear on that.)

At the bottom of the sheet we have the sequencing. First comes Greece, which gets its debt written down by the banks, and gets a new loan from the IMF and the Eurozone. Then comes the bank recapitalization, which has to be done by June. Third up are the non-Greek PIIGS. And finally there’s that wonderful question mark at the end.

The main thing which worries me about this plan is the sequencing: it seems that everything else is contingent on Greece getting its writedown first. And I’m highly skeptical that a 50% writedown from the banks is practicable or likely any time soon. I know the IIF has agreed in principle, but that doesn’t mean the banks are actually going to tender their bonds in practice. And if they don’t, does that mean the whole deal falls apart? We need a lot more details on this, I think. Or, maybe, we don’t. Trying to extract details could mean forcing players to confront the fact that they all think they’ve agreed to something slightly different. And that might not be a good idea right now.


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