In response to Europe's Financial Troubles, Part 2

The EFSF will be fully operational June 2010, however they are awaiting each country to finish their respective parliamentary procedures. The EFSF will be a limited liability company, operating under Luxembourg law, that will be run by a board of directors appointed by euro zone members, the same people who prepare euro zone finance ministers' meetings. The EFSF will work hand in hand with the IMF, however the company will not need to ask for permission from euro zone national parliaments each time it wants to operate so they will maintain control over the funding alongside of the finance ministers. Once the EFSF raises money through the bond issue, it would lend money to the euro zone country in trouble charging higher interest. They are anticipating Triple A credit rating of the EFSF bonds as the euro zone countries have agreed to guarantee 120 percent of the value of the bonds on top of a cash reserve for the operation of the EFSF.

How is it possible that countries in financial trouble can put a 120 percent guarantee on bonds and make them triple A? It is also stated that it will not cost the euro zone countries anything, how is that possible. The countries are incurring more debt, and debt always costs! Notice that when someone wants to produce currency out of thin air, typically a Special Purpose Vehicle is set up. Most people don’t even understand the concept of a Special Purpose Vehicle. We do teach on this in the Financial Boot Camp. It seems that each time we get in more debt, the way to get out of the financial predicament is to incur more debt! The elastic band can only stretch so far, and similarly you can only put so much air into a balloon before it bursts!

In response to Europe's Financial Troubles, Part 1

Very interesting responses have come from the current financial troubles in Europe. In the news, it states that Germany is leading the way by revising their budget to include Billions in savings each year. Is this from budget cuts, or the raising of taxes? From what we can see, it is both, more though on the side of raising taxes and creating new taxes. As mentioned in a previous blog, one of the main ways countries are dealing with the financial troubles is to raise taxes and create new taxes. We are even seeing this here in Canada where we are supposedly better than many other nations!

After much negotiating, the European Union has now approved a Financial Safety Net as part of the response to the European Financial troubles that began mostly with Greece’s debt woes. The Financial Safety Net is worth $440 Billion Euros, which is currently over $525 Billion Dollars. Although this is the amount of the Financial Safety Net, the actual amount including amounts pledged by the IMF totals over $750 Billion Euros, or over $1 Trillion dollars. The program is set up for 3 years and will allow Euro Zone countries to borrow from the EU in the case that the borrowing costs of that EU or euro zone country rise so high that borrowing on the market is unsustainable for reasons beyond its control. Currently, the EU laws forbid any Euro member to assume the debt of another Euro member. The European Union will use the revenues of their budget to guarantee the debt.

How it works is that the Euro Zone country that wants to borrow would tell the EU's executive arm, and the European Central Bank how much it needs, submitting a draft economic and financial adjustment program to the Economic and Financial Committee which prepares monthly meetings of ministers. The ministers would then say "yes" or "no" in a qualified majority vote. The ministers would then set the policy conditions of the financial support, including the maximum amount of the loans, their price and duration, and the number of installments to be disbursed. Once the details of assistance are settled, the Commission will issue bonds to raise cash within the first 60 billion euro limit. If more cash for a euro zone country is needed, a Special Purpose Vehicle (SPV) called the European Financial Stability Facility (EFSF), will issue bonds to raise money on the market.