…Italy & Spain

After the EU triumphalism of last Thursday, over the weekend it has finally dawned on the investment sector that the spendaholics are guaranteeing the debts of the tramp. Yesterday, Slog market and credit sources in Europe were dismissing the much-vaunted ‘solution’ to Greek bailout as a scam.

Initially ecstatic reactions by surprised euro investors were turning to sceptical anger last night, as market opinion leaders begun to latch onto the small print: after Germany and France, the EFSF’s next largest guarantors are Italy and Spain. These are the two countries most experts think will be next in line for a bailout as and when the crisis deepens. The eurocrats are, literally, robbing Pedro to pay Paulakis.

The much trumpeted Sarkozyist ‘European monetary fund’ turns out to be nothing more than a glorified Ponzi scheme.

“The creditors are becoming the debtors — that is the problem,” said Stephen Jen, a currency strategist and former economist for the IMF 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 repeated the warning, pointing out that it would take some €300 billion for the EFSF to make a meaningful impact….if it were called upon to purchase discounted Italian and Spanish bonds in the secondary market.

‘The EFSF has already committed €145 billion for Portugal and Ireland and €73 billion for the second Greek package, [so it] would only be able to use €220 billion out of the €440 billion, which is on the tight side,’ opined the Merrill note. But even those calculations don’t include the capital needs for Europe’s weak banks – which should easily go as high as €250 billion.

Also in the cold light of this New Dawn on Friday, Angela Merkel casually mentioned that the necessary legal changes to the fund’s structure  would not be agreed by the German Parliament until the second half of September. The New York Times reported last night that ‘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 suggest that if the eurocrats want to go on vacation, they take their cellphones,” said Jen.

The EFSF is not a standing fund fully paid up. Each call upon it has to be backed by a bond issue. These only get a AAA credit rating because the biggest contributor by far is Germany. But some sources yesterday were suggesting that this would be in doubt with so much input being expected from two latin countries already themselves in deep debt.

“There is definitely some sleight of hand here,” said one senior Swiss-based credit manager on Sunday, “but then, there always is with the EU people. Having pored over the documentation Friday, it was obvious after a while that there are contributors to this fund who will, ludicrously, have to hock themselves up to the eyeballs to find the money. It’s a crock, a fantasy”.

Britain’s Chancellor George Osborne has declared himself ‘delighted’ with this deal. More likely – given lots of other things on his mind – he isn’t paying attention. But the markets are.