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Sunday, November 27, 2011

Europe: Government debt debacle - remedy to cure the problem

Author Thomas Ramseyer
and ESM - the wrong way to solve the problem

1) EFSF issues debt at substantial lower levels in favour of caving in countries such as Portugal, Italy, Greece and Spain. Bad behaviour of the aforesaid countries is even remunerated.

2) EFSF's activity will be consolidated within ESM, an intergovernmental company. EU-Governments are subject to stepping in in case of Portugal's failure to service the loan.

3) Outstanding pre-EFSF/ESM issued debt will stay the same risk for investors. The haircut will be effective never the less. Another bonus for the weeklings.

4) There will be two markets for government debt throughout Europe. It will become more and more difficult to tell one from the other in a later stage.

5) Because of their stakes in EFSF/ESM EU-countries' qualitiy will gradually deteriorate thus leading to higher interest costs regarding their own issues.

6) It will become more difficult for EU-states to compete because of higher production costs.

European Financial Stability Facility (EFSF) as well as European Stability Mechanism (ESM) cannot be set up like a Hedge Fund.

The envisaged project heavily reminds of the "Gordian Knot" later Sigma Finance Corporation originally found by Deutsche Bank, F. Sarofim & Co and management to be staffed by some well reputated Universities' offspringing econometricians. As known the Sigma acivity has been closed producing a multibillion USD loss to be faced by the rating adict community. Sigma's double digit yielding equity literally imploded.

1) EFSF fully fledged public shareholder company
EFSF's construction must be a fully fledged public shareholder company. All investors will be entitled to recieving the pro-rata results of the company.

2) Sole purpose is buying week states' outstanding debt
The sole business activity of EFSF is buying bonds issued by states recognized week by the market participants. E.g. Portugal, Italy, Ireland, Greece and others to come.

3) 80% shareholders' equity - only 20% bonds allowed
The shareholders' capital must count at least for 80% of the balance sheet.

Advantage - potentially huge gain
Equity Investors can participate in huge gains actually granted by the supervision of the week states' financial situations by Germany and France.

1) Invent aforesaid public shareholder company

2) Do not run EFSF/ESM as intended by potentially parasitizing EU-members.

3) Every EU-country may issue its own debt.

4) If any EFSF/ESM acitivity is to be run parallelly on a voluntary level.

copyright Thomas Ramseyer