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“Through centuries of scourges and disasters, brought about by your code of morality, you have cried that your code had been broken, that the scourges were punishment for breaking it, that men were too weak and too selfish to spill all the blood it required. You damned men, you damned existence, you damned this earth, but never dared to question your code. Your victims took the blame and struggled on, with your curses as reward for their martyrdom – while you went on crying that your code was noble, but human nature was not good enough to practice it. And no one rose to ask the question: Good? – by what standard?”
                                    Ayn Rand, Atlas Shrugged

Commentary & Analysis
You’re invited to the Freedom and Solidarity party today. It’s gonna get crazy.

The European Financial Stability Fund (EFSF) has been in the news. Maybe you’ve heard about it. Currently there are more than 400 billion euros committed to it. These funds can be used to backstop a country on the verge of default, recapitalize banks, or build Dave & Buster’s arcades near the national parliaments.

As the situation in the eurozone grows more complicated and more dangerous, the sufficiency of the EFSF has been called into question. There has been talk about leveraging it up in order to adequately cover defaults and contagion. It is said the needed funds will amount to 2 trillion euros. (I’ve also read somewhere the fund could end up needing 6 trillion euros to contain the fallout.) It is doubtful the EFSF will even have the capacity of 2 trillion much less 6 trillion.

The funding of the EFSF is vitally important for the markets at this stage in the game. The powers in the eurozone have put so much emphasis on the necessity to build rescue funds, create bailout alternatives and recapitalize banks that the market will not like it if Greece defaults, the Portuguese and Spanish come knocking, and the banks begin suffering because there simply wasn’t enough money.

And if you read Currency Currents yesterday, Jack mentioned his latest correspondence with a high profile contact who has a high profile contact with connections in Greece. Anyway, the lack of communication yesterday suggested that eurozone leaders were going to let Greece take the plunge. Rather than spend money to rescue Greece, they’ll save their fire power for the other nations and banks.

When might this decision be announced?

I won’t pretend to know. But be aware that the latest Merkel-Sarkozy rendezvous concluded and indicated some coordinated effort would be announced or agreed upon at the G20 meeting in early November. Based on how the situation has been dealt with so far, and assuming they have already decided to let Greece default, it is likely we don’t hear about it till November (there is probably a lot of prep talk needed before they break that kind of news).

And that takes me back to the EFSF.

If the EFSF is not seen to be sufficiently funded when default news begins to spread, things could get ugly. From Bloomberg:
European leaders are trying to shore up the region’s banks as they debate how best to manage the fallout from any Greek default. Governments yesterday pushed back a summit amid opposition to Germany’s drive for deeper-than-planned Greek bond writedowns that Luxembourg’s Jean-Claude Juncker says may exceed 60 percent.

So what’s holding them back from fortifying the EFSF?


In Currency Currents on September 21st I wrote about the importance of Slovakia’s impending vote on the EFSF. Already there was concern that Slovakia wouldn’t find a consensus to approve the EFSF. And if they didn’t approve the EFSF, then the bailout solidarity would really suffer a major setback.

Now we are at the big day – Slovakia is voting today on whether to fly with the EFSF or defy Eurozone solidarity. The main hold-up is said to be from the speaker of the Slovak parliament and the Freedom and Solidarity party (of which he is the leader).

Who is Richard Sulik?

“It’s an attempt to use fresh debt to solve the debt crisis. That will never work. But, for me, the main issue is protecting the money of Slovak taxpayers. We’re supposed to contribute the largest share of the bailout fund measured in terms of economic strength. That’s unacceptable.”

“If we now choose to follow our own path, the solidarity of the others will also crumble. And that would be for the best. Once that happens, we would finally stop with all this debt nonsense. Continuously taking on more debts hurts the euro. Every country has to help itself. That’s very easy; one just has to make it happen.”

As it stands now, it appears the voting is not going so well … as the Freedom and Solidarity party sticks to its guns, refusing to back the EFSF. It is believed a re-vote may come but later in the week as the government shuffles around.

It ought to make for a good show. Better keep your finger on the ‘sell’ trigger just in case the drama sparks a market cascade.

BYOB – it’s going to get crazy.