March 9, 2021

Europe’s Troubled Economies Join the Rescue Team

Under an agreement clinched on Thursday, the fund will be able to purchase distressed government bonds on the open market and lend money to countries to recapitalize their banks.

The initial reaction by surprised investors bordered on the effusive. But details were scant and a devil lurked amid them — an inconsistency that skeptical analysts and hedge fund investors had begun to latch onto by the end of the trading day Friday.

The potential problem is that, after Germany and France, the facility’s next largest guarantors are Italy and Spain. And they happen to be the two countries that, with their fragile banking systems and high financing requirements, may be next in line for a bailout if the crisis deepens.

In the afterglow of last week’s summit meeting, the rescue fund, known as the E.F.S.F., was quickly labeled an embryonic European monetary fund. In fact, with Europe and the International Monetary Fund having committed close to $1 trillion to the crisis since it flared early last year, the extent to which the new European fund is seen as credible will go a long way toward determining whether Europe’s broader strategy in addressing its economic ills will be accepted by the markets.

Already, hard questions are being asked.

“The creditors are becoming the debtors — that is the problem,” said Stephen Jen, a currency strategist and former economist for the I.M.F. who runs SLJ Macro Partners, a hedge fund based in London. “The burden of support in the euro zone will become even more concentrated on Germany and France.”

In a note to investors on Friday, analysts at Merrill Lynch echoed this theme, pointing out that it might take close to €300 billion for the E.F.S.F. to make a meaningful impact if it were called upon to purchase discounted Italian and Spanish bonds in the secondary market.

“Given that the E.F.S.F. has already committed €145 billion for Portugal and Ireland and €73 billion for the second Greek package, the E.F.S.F. would only be able to use €220 billion out of the €440 billion, which might err on the tight side,” Merrill’s analysts wrote.

And these calculations do not include the capital needs for Europe’s weak banks, the other new area of responsibility for the fund. Some economists say that figure could go as high as €250 billion.

Adding to the uncertainty was a statement Friday from Chancellor Angela Merkel of Germany that the necessary legal changes to the fund’s structure — its size, its financing and its decision making, to name just a few — would not be taken up by the German Parliament until the second half of September, following Europe’s summer break.

With signs of jitters resurfacing late Friday — a rally by Spanish bonds fizzled at the market’s close — the idea that investors would wait patiently for two months for Europe’s leaders to provide the fine print on their grand proposal was met with disbelief in some quarters.

“I would suggest that if the eurocrats want to go on vacation that they bring their cellphones,” added Mr. Jen, the hedge fund investor.

Based in Luxembourg and overseen by Klaus Regling, a German economist and former top official in the European Commission’s financial division, the E.F.S.F. was conceived in May 2010 during Europe’s first attempt to quell market fears over Greece and other debt-burdened nations in the euro zone.

But unlike the Troubled Asset Relief Program that invested billions of dollars in American banks, the E.F.S.F. has not been handed a pot of cash to disburse as it sees fit. Instead, every time it wants to put money to work, it has to issue a bond — backed by the guarantees of euro zone economies.

Because Germany is its largest backer, the fund carries a triple-A rating which allows it to raise money relatively inexpensively (3.3 percent for 10 years, for one recent offering).

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