This sounds like something financial…. a bunch of acronyms.
What Does EFSF Stand For?
EFSF stands for the European Financial Stability Facility.
Great. Why Does it Exist?
It was created in May of 2010 (the week that the world became aware of Greece’s financial woes). The EFSF has one purpose. It is in place to safeguard the financial stability of Europe.
How Does the EFSF ‘Safeguard Europe’?
The EFSF has some tricks up it’s sleeve.
It can provide loans to countries experiencing financial difficulty.
It can go out and buy bonds (ahh, what is a bond?) of those troubled countries in the secondary market. What does this mean? This just means, they are not buying them from counties directly, they are buying them from others who want to sell them– in order to prevent panic or bond yields rising too high (prices falling).
Also, they can also recapitalize or as they say in a British accent recapitalise banks through loans to governments.
Many tricks indeed…
Must Be Nice to be the EFSF– How does it have so much money?
It has guarantees from countries in the E.U. Also, the EFSF can actually issue bonds. So sell a bond, take in a lot of money, and promise the buyers of the bond you will pay them back with interest.
Who Would Buy that Bond?
Well, the bond would be backed by guarantees from the Euro area member states. So it’s not tied to the fate of just one country. There is strength in numbers. As such, the EFSF has the highest rating (actually higher than that of our U.S. Treasury Bonds) that a bond can have.
But is it really that high in credit quality? How good are these counties that are backing it? Aren’t they the ones that need help? Here is a great highly satirical piece from Zero Hedge which questions just how stable the EFSF’s credit rating is: The EFSF as a Hedge Fund.
What, really, does the EFSF Need to Do?
1) Take care of Greece (bail it out, or deal with the repercussions if that is impossible)
2) Make sure Italy and Spain are OK (because while Greece’s impact can be contained, it’s doubtful that Italy’s or Spain’s could be).
3) Infuse European Banks with money (so you don’t have a banking crisis similar to 2008 in the U.S.).
Is this the Silver Bullet?
It may not be. Remember in the U.S. we had all sorts of financial stability programs in 2008—which markets just steamrolled. However—at the margin this is helpful and signals to the markets that governments want to help. The question is can they? The market will decide Thursday AM.
Related Articles: Forbes: Will the EFSF Save the Single Currency or does EFSF mean ‘Euro Finally Seems Finished?’
