Tom has 1 apple.
Tom has promised to give Robbie, Jim, Anne and Mary, half an apple each.
How does Tom get 4 half apples from 1 apple?
While Robbie, Jim, Anne, and Mary are waiting for their half apple, Tom gets hungry and takes a couple bites out of the apple. How does Tom now turn a half eaten apple into 4 half apples?
And you aren’t allowed to call it an iApple and say it can do anything.
Here is the basic problem and why Italian and Spanish bonds are getting crushed again today (ignoring horrific unemployment data out of Spain).
If Italy defaults with a 40% recovery, there is 1.613 trillion euro of debt affected (that is up about 10 billion in about a month). That means creditors would lose 970 trillion. Spain with 663 billion would cost almost 400 billion (its debt has shot up about 15 billion in a month).
The problem is that EFSF doesn’t take default off the table. It may delay the time to default (by helping roll debts as they mature), but all it mainly does is shift who would take the loss. The guarantors can’t handle losses that big.
There is no “ideal” solution because the problem is just an order of magnitude too large to provide any real help. Either the economies are going to get to balanced budgets (some combination of growth and cuts) or it will fail. Will EFSF do enough to see if the economies can get there?
And we have to help the banks too. But it isn’t just their exposure to sovereign debt that is troubling, but their exposure to Spanish real estate for example. We are asking a lot from Germany and France and so far haven’t gotten it. China will likely come up with something, if they put a big number into banks at a good price, or buy all sorts of bonds of Spain and Italy, that is good. If they buy some EFSF bonds, all they are really doing is buying Germany, France, and Holland – helpful, but probably something they are already doing.
Italian 5-year bonds just hit their highest yield since at least 2000. In 2000, German 5 year Bunds were yielding over 5% too. The ECB can cut rates, which could help a bit (they ar quite low already) or it could print money. Either risks unleashing inflation, but I think we are a long long long way from “mission accomplished”. Maybe the 4 am press conference was the EU’s “Bush” Moment.