This was supposed to be the week when the EFSF issued its final deal of the year. The good burghers of the bond market should not be sitting around, offering only a collective shrug at what the blazes is going on with the EFSF, its guarantors and the countries that it has already bailed out or might have to in the future.
Wednesday morning's meeting of EU finance ministers (Ecofin) was postponed on Tuesday, although the EU leaders' summit will still go ahead. There were contradictory reports as to the reason for the Ecofin delay, with some suggesting that the delay reflected the difficulty in reaching agreement, while others said that it was a strategic tactic to placate the non-eurozone countries, some of whom had feared being bounced into any decisions reached by a separate meeting of eurozone-only leaders due on Wednesday afternoon.
Either way — and whichever meeting ends up producing the announcement that matters — there is at least some reason to think the politicians might nail it this time. Europe’s governments finally seem to have grasped the scale of the crisis they are in. Recent history, of course, tells us that European solutions to debt crises turn out to be disappointingly limited. And it has become obvious that there is no silver bullet to kill this one.
But this time, it has to be different. European politicians were forced to face up to the awful prospect of contagion when Italy was sucked into the crisis in the summer. The fudge of a package that was put in place, which this newspaper said at the time fell short, has led to France being dragged far too close for comfort to a bond rout of its own.
If that was not sufficient justification to think that European leaders will not be content to muddle through again, there is the fact that such delays have forced the EFSF to hold off bringing a long-dated deal to market. Given the specialist nature of that investor base, as well as how recently its bail-out partner, the EU, engaged that group of buyers, it is hard to imagine the latter stepping in now to help out with a direct substitute deal.
People who buy EFSF paper, and therefore pay for the bail-outs, need to know with certainty what the EFSF is, what it will do and what rating it will carry when doing it.
Then there is the question of Greek write-downs. With talk of a 60% haircut being proposed, Europe’s already stretched banks find themselves potentially 40% more in the hole than they were supposed to be under the original 21% estimate from the Institute of International Finance. That is far from ideal, but when you consider the risk of contagion to bigger debt markets and the potential black hole of a CDS event, then the picture looks truly bleak.
This is all without even contemplating the horror show that would ensue should big Asian investors decide to withdraw their cash in the event of a default, prolonged chaos or a perceived lack of control at governmental level.
And that is why there is reason to be positive. Governments should by now know all of this and will have heard it from the banks at first hand. There may be no definitive pain-free fix to the problems, but more disappointment would be unacceptable.