On Monday, in Unending Subordination of Private Creditors Continues, I noted that the terms of Spain's bank bailout had yet to be determined. More specifically, it remains unclear if the funds will come from the EFSF or ESM:
If funds for Spain's banks come from the EFSF, the new loans would not explicitly be senior to other private claims but Spain would no longer be able to guarantee the previous loans to Greece, Ireland and Portugal. If the funds come from the ESM (which has yet to be ratified by Germany), the new loans would explicitly be senior to other private claims, however Spain could continue to guarantee loans from the EFSF and ESM.
Although these questions remain unanswered, Mike 'Mish" Shedlock sheds light on the ESM and asks if there are Any Rabbits Left in the Hat?
Assuming the treaty passes, please turn your attention to Article 41.
ARTICLE 41 ... payment of paid-in shares of the amount initially subscribed by each ESM Member shall be made in five annual instalments of 20 % each of the total amount. The first instalment shall be paid by each ESM Member within fifteen days of the date of entry into force of this Treaty. The remaining four instalments shall each be payable on the first, second, third and fourth anniversary of the payment date of the first instalment.
Mish's reader, Brett, who pointed out the above article then offers a breakdown of each country's contribution in the first year.
Capital Contribution Analysis
|ESM Member||Capital subscription (EUR)||2012 Contribution (20%)|
|Kingdom of Belgium||€ 24,339,700,000.00||€ 4,867,940,000|
|Federal Republic of Germany||€ 190,024,800,000.00||€ 38,004,960,000|
|Republic of Estonia||€ 1,302,000,000.00||€ 260,400,000|
|Ireland||€ 11,145,400,000.00||€ 2,229,080,000|
|Hellenic Republic||€ 19,716,900,000.00||€ 3,943,380,000|
|Kingdom of Spain||€ 83,325,900,000.00||€ 16,665,180,000|
|French Republic||€ 142,701,300,000.00||€ 28,540,260,000|
|Italian Republic||€ 125,395,900,000.00||€ 25,079,180,000|
|Republic of Cyprus||€ 1,373,400,000.00||€ 274,680,000|
|Grand Duchy of Luxembourg||€ 1,752,800,000.00||€ 350,560,000|
|Malta||€ 511,700,000.00||€ 102,340,000|
|Kingdom of the Netherlands||€ 40,019,000,000.00||€ 8,003,800,000|
|Republic of Austria||€ 19,483,800,000.00||€ 3,896,760,000|
|Portuguese Republic||€ 17,564,400,000.00||€ 3,512,880,000|
|Republic of Slovenia||€ 2,993,200,000.00||€ 598,640,000|
|Slovak Republic||€ 5,768,000,000.00||€ 1,153,600,000|
|Republic of Finland||€ 12,581,800,000.00||€ 2,516,360,000|
|Total||€ 700,000,000,000.00||€ 140,000,000,000|
|Total Less Spain||€ 123,334,820,000|
|Total Less Spain + Greece||€ 119,391,440,000|
|Total Less Spain + Greece + Portugal||€ 115,878,560,000|
Brett argues that Spain, Greece and Portugal will not be able to contribute given their current public debt troubles. This may be true, but it seems to ignore a specific advantage of the ESM over the EFSF (as noted above), which is that countries can continue to provide guarantees while receiving loans from the fund.
Assuming that Spain contributes their portion, the contributions of Greece and Portugal remain dubious. Would the EU provide new bailouts so that those countries could meet their commitments? Also, what about Ireland and Cyprus? Having been shut out of debt markets, will those countries increase their public debt further in order to provide capital to the ESM?
Even if all €140 billion is obtained, the current Spanish bank bailout of €100 billion will deplete most of the current funds. Given that Irish banks remain insolvent and Spanish banks will require far greater sums, where will the next round of funding come from? Yields on Spanish and Italian debt are already unsustainable and rising fast, even before these large capital contributions are made. What happens if Spain or Italy requires a bailout for their public debt later in the year?
When the ESM was proposed, the notion of a €700 billion bailout fund sounded impressive. It's now clear that the structure of subordinating private debt places upward pressure on yields and the sum is utterly inadequate for the task at hand. Whether or not the ESM gets ratified in the near future, the crisis will continue.