Martingales — doubling up your bet after a loss — seem to be quite the fashionable thing to do at the moment in terms of big currency-defining systemic gambles.
Thursday’s example came from plans for that not-really-saving-much European bailout fund. As the WSJ reported (but the EU Commission promptly — all too promptly — denied), its size could be doubled:
The European Commission is pushing to double the size of Europe’s €440 billion ($586.52 billion) bailout fund for indebted euro-zone countries, according to people familiar with the situation…
Bundesbank President Axel Weber hinted at the discussions going on behind the scenes when he said on Wednesday that euro-zone governments would expand the EFSF if necessary.
The German government views Mr. Weber’s comments as badly timed…
We’ll bet they do.
Like we said, the problem’s been looming for months and is probably at least as much because of the EFSF’s various credit enhancements which garner its AAA-rating, rather than just how much raw funding goes in.
But of course, that latter funding will be depleted if countries which have supplied it suddenly go from EFSF lender to EFSF debtor. You’d wonder whether ‘doubling’ the fund would actually just mean restoring it to its advertised size of €440bn, versus the €250bn or so it’s probably got at the moment. It depends on which countries attempt access.
Such as Spain. Which is the immediate trigger for doubt over EFSF bazooka-ness here, and no doubt what’s turned the EU commission rather shy about the entire issue. It’d be effectively admitting that Spanish sovereign funding — and banks — will need assistance. Even Spain’s government gets this, as it’s ratcheting up efforts to show its ability to control its debt.
More to the point, if you’re arguing that the EFSF’s principal objective really involves bailing out European bank bondholders, the currently-sized overall European stability mechanism happens to extend to just about every peripheral banking system apart from Spain’s.
This is getting to be well-known in the market, but this chart from Nomura rams the point home, since it excludes those Spanish bank requirements just to note Spanish government financing needs:
And note that they’ve assumed loans to Ireland will total just €90bn. Increasing levels of doubt there, too.
And as for the importance for currency markets of the incredible shrinking/doubling EFSF, Nomura have updated their recent risk premium analysis of the euro to factor in Spain contagion:
Last, but not least, however. You can double an EFSF in size, but you sure can’t make it (and its anti-restructuring charms) time-travel.
Related link:
That EFSF sense of urgency – FT Alphaville
Around the eurozone in distorted CDS curves – FT Alphaville