Thursday, 20 October 2011

Is the EFSF going to save Greece ?

The yields on peripheral countries are getting higher and higher, reflecting worries about the high levels of debt and fiscal deficit within these countries (Portugal, Ireland, Greece and Spain). The 1 year Greek yield reached an apex of 188%. Just a year ago the yield on a 1 year Greek bonds was only 5%. The same goes for Portugal where the 1 year yields 18%, from 3.2% the 2010 figure. Ireland was partially saved by bond purchases and the yield stabilized to 8% after peaking at 22%. Will the EFSF cool-off the European debt crisis ?

What is the European Financial Security Facility

It is officially a company established by the European Union to preserve the financial stability of the European Union by providing guarantees to investors. The investors would purchase the EFSF bonds which would be exchanged with toxic debt bonds such as Greek bonds. Therefore the EFSF doesn't really pool funds (liquidity) from the European Union, it only guarantees some of the losses which otherwise the sovereign bond holders would have to experience in case of default.

Who is providing the guarantees ?

This is the tricky part, as some of the countries that are providing guarantees to cover some of the losses are in a deer financial position. This is the full list:

Still unanswered questions

Some of the countries that provide financial guarantees are going to be the direct beneficiaries of this facility ? How can this be ? What happens if one of these countries, or worse, more of these countries go into selective or total default? Who is going to pay the bill ?

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