Complex and controversial financial tools weighed in eurozone rescue

It's more than just setting up a massive bail-out fund

The prospect of a fully fledged plan to solve Europe’s debt crisis emerging at Wednesday euro-zone summit is fading. But what is becoming clear is that any solution will be far more complex than the fiscally stable European countries putting enough cash in a fund to save whatever debt-burdened countries falter. Instead, the approximately $600 billion envisaged for the so-called European Financial Security Facility would be used to lure foreign sovereign and private investors, mainly Chinese and Middle Eastern, to buy bonds of troubled euro zone countries. European presidents and prime minsters, though, haven’t yet figured out exactly how. One model would provide first-loss guarantees on sovereign bonds issued by troubled euro-zone members. So if a country became insolvent and couldn’t pay 50 percent of what it owed, the loss to investors might be just 30 percent instead of the entire 50 percent—the EFSF would cover the other 20 per cent. But would that partial cushion be enough to attract outside investment? Some observers doubt it. The German magazine Der Spiegel’s online English edition surveys the complicated arrangements being contemplated, and suggests they are similar to the use of repackaged subprime mortgages and other weird investment products before the 2008 global market meltdown—the investment smoke and mirrors that amounted to “finance tricks to transform questionable debt into sure-fire investments.”

Der Spiegel


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