{"id":5150,"date":"2011-11-06T22:58:31","date_gmt":"2011-11-07T03:58:31","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5150"},"modified":"2018-09-21T02:04:39","modified_gmt":"2018-09-21T06:04:39","slug":"the-latest-plan-for-resolving-the-european-sovereign-debt-crisis","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/11\/06\/the-latest-plan-for-resolving-the-european-sovereign-debt-crisis\/","title":{"rendered":"The Latest Plan for Resolving the European Sovereign Debt Crisis"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">On 27 October 2011, after months of discord, European leaders ironed out a plan to address the escalating <a title=\"Guide to the European Sovereign Debt Crisis\" href=\"http:\/\/wp.me\/p1SgTN-2u\">European sovereign debt crisis<\/a>. Here is an overview of what exactly that plan entails.<\/span><\/p>\n<div>\n<ul>\n<li><span style=\"font-size: 16px;\">Reduce Greece\u2019s debt to a sustainable level.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">Current Greek debt holders are asked to voluntarily take a 50% write-down in the value of their bonds. There was a fear that any write-down in the value of Greek debt would constitute a default event. However, the <a href=\"http:\/\/www2.isda.org\/\">International Swaps and Derivatives Association<\/a> (ISDA) ruled that because the write-down is voluntary, it does not technically constitute a default event.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">In exchange, the current Greek debt holders are to receive safer bonds.<!--more--><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">Recapitalization of Europe\u2019s banks so that the <a title=\"Tier 1 Capital Ratio | Wikipedia\" href=\"http:\/\/en.wikipedia.org\/wiki\/Tier_1_capital\">tier 1 capital ratio<\/a>\u00a0is 9%.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">Europe\u2019s banks need to raise \u20ac106 billion in order to meet this obligation.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">The banks have nine months to comply.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">The \u20ac106 billion price tag may be too low as the models that derive the figure do not assume a \u201cstressed\u201d scenario.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">Creation of a \u20ac1 trillion firewall.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">The firewall is intended to prevent a run on European banks if there should be a default event.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">After bailouts of Portugal, Ireland, and Greece are factored in, the <a href=\"http:\/\/www.efsf.europa.eu\/about\/index.htm\">European Financial Stability Facility<\/a> (EFSF) has approximately \u20ac200 billion of spare bailout capacity.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 10%;\">\n<li><span style=\"font-size: 16px;\">The \u20ac1 trillion will be raised in one of two ways, both of which leverage the EFSF by roughly 5x.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 15%;\">\n<li><span style=\"font-size: 16px;\"><strong>Method 1:<\/strong> The EFSF will effectively issue credit default swaps on European sovereign debt by insuring the first 20% of losses.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"margin-left: 15%;\">\n<li><span style=\"font-size: 16px;\"><strong>Method 2:<\/strong> The EFSF will create special purpose vehicles (SPVs) to attract private investors and\/or sovereign wealth funds, such as China and Japan. The SPVs would offer to take the first 20% of losses that these investors might suffer. Effectively, this method is like a collateralized debt obligation (CDO).<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">Closer monitoring of national budgets and economic policies.<\/span><\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">Possible changes to the European Union or eurozone charters to allow for greater economic and taxation integration.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Potential Problems<\/strong><\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">The EFSF does not actually contain sovereign cash. Instead, its sovereign backers provide guarantees that are used to attract monies from private bond markets. Monies will only be paid out in the event of default. Yet, these defaults might actually restrict a state\u2019s ability to fulfill its obligations under the EFSF.<\/span><\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">German legislators voted on 26 October 2011 that their country will not contribute more money to the EFSF.<\/span><\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">On the same day, German legislators also voted in opposition to the <a href=\"http:\/\/www.ecb.int\/home\/html\/index.en.html\">European Central Bank<\/a> (ECB) purchasing the debts of European sovereigns. The funds for these purchases rely upon the ECB\u2019s singular European power of printing money to monetize European sovereign debt. The Bundestag\u2019s vote effectively serves as a statement of opinion.<\/span><\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">The funders of the EFSF have their economic fortunes intimately tied in with the fortunes of those that they are insuring. This correlation means that any sovereign debt loss event that needs to be absorbed by the EFSF mechanism simultaneously weakens the EFSF and the backers of the EFSF.<\/span><\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">It is uncertain how European banks will raise \u20ac106 billion in additional capital in the next nine months. Traditionally, European banks have increased their capital not through attaining deposits but by issuing their own debt or equity. Unfortunately, the market for bank capital has dried up.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><em>Originally published on CFA Institute\u2019s \u00a0<a href=\"https:\/\/blogs.cfainstitute.org\/investor\/\">Enterprising Investor<\/a>.<\/em><\/span><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>On 27 October 2011, after months of discord, European leaders ironed out a plan to address the escalating European sovereign debt crisis. Here is an overview of what exactly that plan entails. Reduce Greece\u2019s debt to a sustainable level. Current Greek debt holders are asked to voluntarily take a 50% write-down in the value of [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":5151,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[70,71,72,73,74,75,76],"class_list":["post-5150","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-blog","tag-cdos","tag-european-central-bank","tag-european-financial-stability-facility","tag-european-sovereign-debt-crisis","tag-european-union","tag-eurozone","tag-greece"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5150","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=5150"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5150\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/5151"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=5150"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=5150"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=5150"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}