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New Report Outlines Possible Options For Eurozone And None Of Them Are Desirable

You’ve heard George Soros talk about it. You’ve heard it talked about on CNN, FOX, MSNBC, etc. You’ve also read about it on The Blaze, Drudge Report and countless other websites. By now you probably have a couple of questions:

What exactly can the European Financial Stability Facility (EFSF) do to stabilize Europe? Can they do anything at all?

For answers to these questions, we can turn to the writers at Zero Hedge. In an article titled Everything You Wanted To Know About EFSF (But Should Be Afraid To Ask), they highlight an interesting report from Nomura (a financial services group and global investment bank) that discusses possible courses of action that the EFSF can take to try to cure Europe’s financial ills.

They break down various scenarios, which include:

  1. The structural weaknesses of EFSF 2.0
  2. Proposals for an EFSF 3.0 (and their variants)
  3. Leverage-based options
  4. EFSF 2.0 as TARP

The study then goes on to say that most (if not all) of these options can only end in one of three outcomes:

  • Fiscal union
  • Monetization
  • Major restructurings which risk ending of the euro

In the words of the Nomura report:

While the most elegant solutions have no official sanction, we think the necessary political resolve is yet to be forthcoming, and the technical issues are challenging if not insurmountable for many of the legal workarounds, resulting in the need for yet another round of parliamentary approvals. Consequently, we see a significant risk that the market, looking for large headlines and enhanced flexibility, will be disappointed at least in the short run [emphasis added].

Well, they don’t sound like they have much confidence in the ability of European leadership to adequately deal with the crisis. In fact, it sounds downright bleak.

The report then proceeds to walk through each of the “steady state solutions” (defined as the market no longer being concerned about future default risks on government debt – at least over a time-frame that is meaningful to immediate asset allocation decisions) and their economic implications:

1. Full fiscal union and the issuance of Eurobonds with a joint and several liability structure or at least unconditional credit risk transfers to stronger countries for a extensive period of time (for sustainability to be reestablished).

2. Aggressive policy reflation, whereby the ECB [European Central Bank] significantly expands its balance sheet and its SMP [single market] program. (Given the requirement of EU governments to recapitalize the ECB, this option ultimately begins to blend into option 1.)

3. Default and debt restructuring in selected non-core countries and possible end of the euro area.

The report then proceeds outline the dangers and implications involved with each of these options:

Option 1: [It] is not under consideration at this juncture since all forms of recent fiscal or credit transfer appear to come with strict conditionality. As for the possibility of Eurobonds, it has been dismissed by the AAA countries and the German Constitutional Court’s ruling that uncapped liabilities accruing to the German state from its participation in the EU is unconstitutional.

Option 2: May be a possible solution to the crisis, albeit with drawbacks, but our economics research team does not believe that the ECB is close to accepting the significant increase in credit risk on its balance sheet and the distorting influence on its monetary policy that this option would entail. The ECB is not programmed for full-blown monetization and the bar is extremely high for any major steps in this direction.

Option 3: For [the above] reasons, the possibility of further debt restructuring in selected countries has become increasingly likely and in recent weeks has underpinned investor risk allocation decisions. The consequences would depend on the ability of EU politicians to isolate other periphery countries and European banks. This may prove virtually impossible without significant credit risk transfers, so ultimately European politicians will need to pick one of the three outcomes: fiscal union, monetization or major restructurings risking the end of the euro area.

As mentioned in the headline, these seem to be the only realistic choices for the eurozone. The first two options do not seem feasible which leaves us with option 3: restructuring.

Also, as mentioned in the headline, none of these options are any good.

Read the Original Report Here: NMA_EFSF

Comments (9)

  • beardman48
    Posted on October 5, 2011 at 1:44pm

    Watch and see if they do away with their money and go to a mark.

    Report Post »  
  • barrycooper
    Posted on October 5, 2011 at 9:18am

    I read a lot of economics, but I don’t know what “monetization” means. Apparently, it means money printing.

    One thing it is important to realize is that money is not real. Not even gold has, as they say, “intrinsic value”. If you are adrift on a raft in the middle of the ocean, you would be well advised to toss any you have overboard.

    Money provides a path,a channel, for facilitating transactions. If you mess with it too much–as in inflation–it becomes unclear what it is worth, and its value, figuratively and literally, declines.

    What Europe faces now is the outcome of the decisions of silly people, mainly in the south of Europe, to behave responsibly. The Greeks thought the bill for the party would never come due. They ordered all the drinks, but figured the Germans would foot the bill. They won’t. This means the Germans shouldn’t invite the Greeks to any more parties.

    All of their economies, though, are intertwined. They are like Siamese twins–and this was the design intent–making separation difficult. But it must be done. They need to reboot.

    I post a solution several times weekly, in various places, that I think should be considered. Here: http://www.goodnessmovement.com/Page14.html

    It attempts to look at things correctly, systemically, from a perspective you have likely not seen anywhere. This is original.

    Report Post »  
  • chicago76
    Posted on October 5, 2011 at 8:51am

    By taking away any backing of money they guaranteed that cash would crash. Socialist governments love to give out other peoples money too much, So much that they will even print it if they don’t have it.

    Report Post »  
  • dizzyinthedark
    Posted on October 5, 2011 at 7:40am

    The new currancy will be Carbon Credits, dollars, euros, gold and silver will be of no value to any of us. Save our Republic and stop the Smart Meters going onto your homes, demand of our politicians the implementation of these meters is against the law and perhaps the 4th Amendment–The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

    The new appliances coming to your homes will be retrofitted with a ‘controller chip’ that will communicate with a Smart Meter and as soon as the Smart Grid goes into effect they can shut down your usage of your appliances from a remote site. Also with this ‘chip’ they can track not only time of usage, but where that appliance was sold to and this information can be bought and sold. Also criminals will also be able to detect if you are home or not by hacking into ‘the Smart Grid’ system to see if you are using any of your appliances.

    Report Post » dizzyinthedark  
  • dnewton
    Posted on October 5, 2011 at 2:13am

    If you doubt, don’t understand or resist learning what caused the European crisis, it is not likely that the solution is going to appeal to you. The same is true in the US. More of the hair of the dog that bit you, meaning debt, manipulation and deliberate bubble formation, will just make the crisis worse or extend it longer into the future. The madness approaches the concept of building a fire on the deck of a wooden ship to keep warm. The short term gains are made at the expense of the long term consequences.

    Report Post »  
  • fobama
    Posted on October 5, 2011 at 1:33am

    Cashless society is coming, an then the mark of the beast shall come

    Report Post » fobama  
    • Ruler4You
      Posted on October 5, 2011 at 2:07am

      I agree, a cashless society is coming. Greece is going to default. And the EU is going to come apart. Coupled with the U.S. dollar failing (which it already should have done) that will be the stimulus for a “new global economy.”

      Report Post » Ruler4You  
  • mad_hatter
    Posted on October 5, 2011 at 1:01am

    You should see the forecasts of European Traders. They all say the same thing… the European Market will fall: http://www.americanparchment.com/video/2011/oct/trader_eurozone_crash.html

    If they crash, we will crash. Interesting that someone like George Soros has predicted the same thing.

    Report Post »  
  • omni
    Posted on October 4, 2011 at 10:12pm

    Bohica

    Report Post »  

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