As two-year Spanish bond yields hit 4.93% and the market launches itself into another bout of eurozone hysteria, one man remains calm amidst the storm. Christophe Frankel, CFO of the EFSF, is adamant that Europe has sufficient resources to deal with its problems. “There is sufficient firepower available,” he insisted at the ICMA AGM in Milan in May. “When the ESM becomes operational on July 1 it will have €32 billion paid-in capital and combined with the EFSF will have a lending capacity of €500 billion.” Frankel says that €1.196 trillion has now been made available for disbursement from the two Greek support packages, the adjustment programmes for Ireland and Portugal, the ESM,the ECB's SMP and additional resources that Europe will provide to the IMF. “Of this €807 billion is still available,” he said. “In addition the EFSF/ESM can leverage resources and the ECB provides unlimited liquidity to banks.”
So nothing to worry about, then. “The financial media is biased towards the Anglo-Saxon approach,” Frankel complained. “Current account balances are not taken into account enough by the market. There has been improvement that was not there even one year ago particularly in terms of unit labour costs and current account balances.”
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| -EFSF CFO Christophe Frankel |
Still, with limited exchange rate flexibility, further nominal adjustment in wages and prices could exact a heavy economic toll in the near-term -dragging markets down further. What's more, markets really want crisis-stabilizing funds to have the firepower to cover Spain, Portugal and Italy's funding needs in the months ahead.
In any case, let’s hope Frankel is right, as that EFSF/ESM firepower could be called in sooner rather than later. EFSF/ESM funds can be used to finance recapitalisations of financial institutions in non-programme countries but the loans must be routed via the government. As we have reported, there is huge pressure, particularly from Spain, for the rules to be changed to allow the bailout fund to provide funds directly to banks. “It could be argued that such a change is, to an extent, a Eurozone wide deposit protection scheme (although limited in size) through the backdoor,” say analysts at Rabobank.
Gary Jenkins, principal at Swordfish Research, argues that the time has come for the EFSF together with the ECB to buy government debt directly. “The ECB/EFSF/ESM should start buying government bonds, but do so at a targeted yield and/or at a targeted spread over Bunds,” he says. “Obviously they have to demonstrate to the market that they have the firepower to do this in sufficient size and that they are prepared to do it for a decent period of time. This would be regarded by many as an extreme step to take, but I do not think that half measures will work if Spanish bond yields continue to rise.”