EFSFs, CDOs, CDSs … Or Just Gold?


The combination of political deadlock in Greece and the fact that the European Financial Stability Facility (EFSF) will be funded by debt and not money printing has caught investors off guard recently. They failed to discount the ability of politicians to find other options in their attempts to exhaust all other options before turning to the inevitable one. Hence the falling markets of late.

The largest risk to these forecasts is the sovereign debt and banking problems in the euro area,
….The Bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility. A worse outcome in Europe would adversely affect the Australian economy,…

RBA, ” target=”_blank”>Euromoney the sort of thing these people come up with to try and solve the crisis:

‘If one were tasked with designing a CDO that would be guaranteed to fail it would be hard to come up with a better structure than what the EU is proposing for the EFSF.’

Now Wall Street, to the small extent that it is still capitalist, has wound down many of the ridiculous practices of the boom years. Like issuing CDOs doomed to fail. But the politicians have other ideas. They want to use those very practices to bolster their bailout fund, the EFSF, to size.

It reminds us of this quote:

‘The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.’

Former US Chairman of Economic Advisors MEPs and their friends are off on a mission to create a bailout fund they call the EFSF. They want more confidence when there is too much. They want more borrowing and lending when debt is the problem. They want governments, on whose payroll MEPs are, to be able to continue running deficits. And they are going to achieve these noble goals using the same method that triggered the financial crisis of 2008. More of what Larry Summers calls ‘irony’.

There is an even more groan-worthy aspect to this. The EFSF will use credit default swaps (CDSs) to guarantee some percentage of some countries’ sovereign debt. If you missed wealth portfolios. It has no middle man and no counterparty. It’s yours if it’s yours. And, short of messing with the periodic table or new

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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