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Friday, October 14, 2011

Your deterrent is my bluff

Joseph Cotterill

Two revealing quotes on the EFSF insuring sovereign debt…

The first, via the WSJ:

"It is a system we already know functions well and could encourage foreign investors to come back to the euro zone, and it can be a deterrent form of leverage," the senior French official said."The principle of a deterrent is that the threat is greater than the action. It's like in chess or in the military sphere—and it's also true in finance."

And another one from Friday's FT op-ed piece by Paul Achleitner of Allianz, the latest promoters of the idea:

Assume for a moment a risk coverage [amount of bond principal insured] of 40 per cent for Greek, Irish and Portuguese bonds and 20 per cent for Spanish and Italian issues: one could fund 4.5 times the guarantees, leading to a theoretical funding power of up to €3,000bn, which should definitely silence market criticism about lack of firepower and end speculation. All of that would be on a purely unfunded and contingent basis, without increasing guarantees beyond what has already been decided. Indeed, with a bit of luck, not a cent would need to be spent...

(We're not even going to go into the fragmentary consequences of insuring new holders of, say, Italian debt while leaving out the old creditors, many of which will have pledged the bonds as collateral elsewhere. Differential treatment in sovereign debt is a big no-no. Merely one reason among many why this isn't just another French opportunity to wave around their force de frappe…)

Read the whole story here:



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