From Dave Vealey:

On April 17 the EFSF made a 25 bb loan to the Hellenic Financial Stability Fund (HFSF) guaranteed by the Greek government. The HFSF used these funds from the EFSF to buy 25 bb EUR of 6-10 yr EFSF FRN MTN bonds.

On May 28th, 18 bb of the 25 bb EFSF bonds were sold to the Greek banks by the HFSF in return for convertible bonds or new shares in the bank.

The EFSF bonds are eligible collateral at the ECB and are thought to have been used to replace previous ELA borrowings by the same Greek banks.

This operation gives the Greek banks capital plus improved funding with the Greek government ultimately liable for the initial loan from the EFSF. However, no EFSF bonds were needed to be issued to the market. Effectively the ECB financed the Greek banking systems recapitalization.

The total amount set aside by the EFSF for Greek bank recapitalizations is 48 bb euro.

A similar structure could likely be done in Spain:

ESM makes a loan to the FROB (loan gtd by Spanish govt) to buy ESM bonds
The FROB buys ESM bonds
The FROB then sells the ESM bonds to banks in return for convertible bonds or common stock ownership in the bank
The Spanish bank then has a capital injection and the ability to post ESM bonds at ECB for funding

This avoids in theory at least, the ECB directly bailing out the Spanish banking system

16 Responses

  1. Sounds kind of Rube Goldberg like to me. I guess the acid test is whether there is a free lunch lurking somewhere in the plan.

  2. And where does the write off of non-performing loans come in?

    This all looks like liquidity management tricks to push the problem down the road a few months.

    1. @Neil Wilson,

      Neil: “And where does the write off of non-performing loans come in?”

      From accruing income. As always and everywhere if you extend the life-time a bit.

    1. @ESM,

      It really is amazing that the right who adore Reagan have forgot about cutting taxes. Reagan made the debt and deficit explode, and the country prospered. You wonder when they’ll put it together.

      The first party to really understand MMT will have a field day at the polls.

      1. @JCD,

        “The first party to really understand MMT will have a field day at the polls.”

        I’ve thought so too since I first got my head around it, but if that party fumbles the sales pitch, they could get steamrolled (which is probably why those influential party operatives who get it–e.g., Daschle?–keep it to themselves for the most part). Most of the world still thinks sovereign deficits are an evil to be avoided, or at least a potential problem to keep in check. And if we’re honest, they can be – we’re just nowhere near that point today.

        Also suspect you couldn’t get an MMT plank into a major party platform unless/until one or more of these happens: (1) Bob Rubin and Art Laffer’s generation is largely retired or worse, (2) a 3rd party gains enough support for it to be co-opted, or (3) things finally get bad enough that US voters go the way of France (sort of the inverse of 2010, though without (2), the Left is likely to be as austere as it was during the Clinton years, unfortunately, and perhaps the more austere of the two parties, although the GOP now has an answer to the Blue Dogs in the Tea Party).

        Seems to me (1) is most probable, so plenty of patience required. In the meantime, let’s hope the GOP doesn’t dismantle counter-cyclical policies too severely.

    2. @ESM,

      Really interesting. If Hugh Hewitt’s thinking about this Mark Steyn can’t be far behind. Wouldn’t that be great.

    1. @Bubbles and Busts, Using the EFSF doesn’t subordinate private creditors but using the ESM does. This means that there is a €440bn cap on this way of recapitalizing, as well as a 18 expiration date. The EFSF debt will be converted into under the ESM without gaining in subordination over private creditors.

      This means we can mark our agendas for the next wave of market turmoil upon EFSF expiration.

      1. @WARREN MOSLER,

        That is a good question Warren! Where would the US states be if there were 60 state currencies and 60 individual SDIC’s? If the tower of babel was dispersed instead of so centrally concentrated?

        If chinese overlords wanted to do evil – would it be harder to do so with 50 states currency systems – dispersed and divided? Or is it easier if there is 1 central fed to rule them all and just pollute bernanke and geithner?

        All my training in networking technologies at IBM taught me that robustness was very poor in client-server model where if the 1 central server goes down, that 1 point of failure takes down everything. Much better to have redundancy and distribution. If your blog blows up tomorrow, I have other places to go to read MMT memes, isn’t that better Warren? Certainly you wouldn’t want all MMT education to just come from here, a signle point of failure would kill your meme. You have said 1 central world wide currency issuer with appropriate counter cyclical policies could work, but that is not the nature of men’s hearts, that is too much power in 1 place.

        I hear some policy makers at the state level saying it is time for state level money, they no longer want to be part of the federal level money system. My old econ professor said a national defense and wealth redistribuation was the only benefit of the fed government, and he no longer sees the need for such a national defense or state to state wealth redistribution.

        One state senator told me he was earning interest in “ounces of silver” at some indian nation bank free from FDIC falsehoods:

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