No, Uncle Sam isn’t bailing Europe out

Either US Treasury officials (or Reuters ledes) are supreme masters of subtlety, or markets are very stupid.

We’re going with the latter.

We want you to carefully note the following wording of this Reuters report:

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday.

“There are a lot of people talking about that. I think the European Commission has talked about that,” said the U.S. official, commenting on enlarging the European stability fund. “It is up to the Europeans. We will certainly support using the IMF in these circumstances…”

The IMF, whose biggest single shareholder is the United States, has now contributed 250 billion euros or one third of the EFSF financial rescue mechanism.

While Wall Street also took off on the report, says Reuters. But…

‘Via an extra commitment… from the IMF‘. ’We will certainly support using the IMF…’ That use of ‘via’ is especially, magically, ambiguous in terms of the United States’ actual promise here.

This is not the same as ‘we will shove taxpayer cash above and beyond our normal contribution towards the IMF into an enlarged European bailout fund.’ What the official is actually saying is ‘we’ll contribute as normal our share of IMF resources, but we’ll support whatever the IMF lends in the context of a larger EFSF’.

Look, let’s take this from the top.

First, yes, there is some increasing talk that the European Financial Stability Facility (but just the EFSF, mind you) may be doubled in size.

This is probably to help it cover a Spanish contingency. Here’s one estimate that currently available funds from the EFSF and elsewhere can’t cover Spain and its banks at the moment, for instance. There’s a lot more complication to this, however, because the EFSF needs to be overcollateralised to guarantee its AAA rating for issuing its own bonds in the market.

Which is the whole point here. The EFSF is separate to the IMF and requires separate funding, separate staff, separate negotiations with sovereigns. Above all: The IMF does not automatically lend out double its previous commitment if the EFSF doubles, and even if it indeed did this, the United States’ IMF contribution does not double.

In smaller words: The IMF and the EFSF are two different things. US funding of the IMF happens to be a different, entirely unrelated thing altogether. Even if the EFSF doubled in size and also actually made further, increased loans to distressed sovereigns, there is no guarantee that IMF loans would behave similarly.

In more complicated words:

There is no big IMF pot of money waiting for sick European nations, and to which the US is now giving more than it usually gives to the IMF. The US contribution remains based on the same quota that has always been used. Meanwhile, the IMF often borrows — and then extends its own loans — on a case by case basis rather than using quota-sourced funds to finance loans. In any case, it’s not drawing down from a magic €250bn-or-something pot of money that already exists. So please don’t carry on like there’s about to be a US capital injection into Europe.

If you want to look at the mechanics of how the IMF actually lends to peripheral sovereigns, this is a good primer from the WSJ in May on Greece’s experience. It makes clear that the IMF tapped bilateral loans under a special facility with Japanese and European governments, then borrowed from the Federal Reserve for its own loans to Greece.

Phew. Now this doesn’t mean even a US statement on Europe — even a statement of the obvious — is insignificant at this particular moment of crisis in the eurozone. Quite the contrary — it’s a sign of impatience.

First, within risk assets themselves, which increasingly look like they’ll end up ripping to shreds when they realise there is no magic bullet to Europe. Secondly, it signals impatience between the US and Europe.

We’ve just heard from a good source how many times President Obama phoned German Chancellor Angela Merkel in the week running up to the original announcement of the EFSF in early May 2010, for example.

It was three times. And as far as phone calls from the Oval Office go as international pressure, three times in a week is apparently highly rare indeed.

We wonder if anyone’s been counting the calls recently. That’ll be a much better indicator of systemic stress — or salvation — than rumours of an American helicopter drop.

http://ftalphaville.ft.com/blog/2010/12/01/423741/no-uncle-sam-isnt-bailing-europe-out/

 

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