Cyprus is still a mess. Let’s seen what happens over the weekend and at the latest on Monday, when ECB emergency loans could be cut off.
Naked Capitalism makes mention of the dire straits of Slovenia and France. France has been kind of almost on the radar for a long time, at least in the connection of its banking system being burdened by the problems of Spain, Portugal and Greece. Slovenia has been more invisible, but Edward Hugh already anticipated this early Summer 2012.
The big problem in European terms is nonetheless France, in connection with the European Financial Stability Fund. Yanis Varoufakis alluded to the structural (toxic) problem of the EFSF in 2011, which is essentially that it relies on the strong countries to leverage the money in the EFSF. If France wobbles, then the whole structure starts to collapse:
But what makes EFSF bonds even worse is that the structure of these eurobonds is heavily dependent on the underlying risk. Lest we forget the lessons of 2008, financial disasters strike when bankers and authorities neglect the effect of their instruments and trades on the solvency of the underlying assets in question. It is in this sense that EFSF’s eurobonds are, clearly, part of the euro crisis rather than a solution to it. To see this, consider the destructive dynamic inbuilt within the EFSF bonds: Suppose Portugal exits the markets, as it is bound to, and runs to the EFSF for loans. The EFSF will have to issue new debts, on behalf of the remaining eurozone countries. This means that, with Portugal out of that group, a greater burden will be shared by the N-1 countries remaining as pillars of the EFSF. This means that the markets will immediately focus on the new ‘marginal’ country: the one that is currently borrowing at the highest interest rates within the EFSF in order to loan the money to Portugal. Immediately, it’s own spreads vis a vis the German bond rates will rise until that country (Spain in all probability) is also pushed out of the markets. Then there will be N-2 countries left to borrow of EFSF’s behalf and the markets will focus on the newer ‘marginal’ country. And so on, until the band of nations within the EFSF is so small that they cannot bear the burden of total debt on their shoulders (even if they wish to). At that point, led by Germany, these remaining. solvent, states they will leave the euro.
I can’t say how much the OMT-program can prevent this dynamic but the stalling of France is a really bad sign in this regard.