- The Moral Hazard Of The EFSF Plan

There is some talk about making the EFSF into a body assigned to permanent bond buying in Europe. This is a very interesting idea. It would be funded by the rich European countries and then use the funds to equalize the markets between the mismanaged European countries and those that funded it. Italy’s debt, and Ireland’s and Greece’s will all be cheaper to fund, and the difference in cost will be made up by France and German using the EFSF to circumvent market forces. This will hurt their broader government balance sheet somewhat, and thereby raise their cost of funding, greater reducing the differences. It's a sort of fiscal socialism for Europe's nation states.

Another way to describe it as a synthetic CDO (Credit Derivative Obligation) where the less credit worthy countries are given a portion of the stronger country’s credit standing. And in the process of creating the transfer, the stronger counties both increase their hold on the weaker ones, and directly circumvent the ability of those evil ‘speculators’ to bring market forces to bear on any of it. It’s a fiendishly elegant means of stripping the capital markets of their effectiveness, and doing it all without having to get anyone’s political permission, or firing a single shot.

The problems with taking this route should be obvious. But bureaucratically circumventing the political autonomy of the various people’s of Europe will be nothing compared to what will happen downstream with this idea. The moral hazard, already tragically obvious in the condition of Greek finances, will be greatly, GREATLY amplified. And unless the at risk economies of Europe suddenly change their stripes, they will quickly run right up to the backstop. Assuming that backstop is set in the 1 to 2 Trillion range (numbers that are frequently discussed for this idea) then by the time they reach it, the impending collapse will be so large that the chance of contagion will be very nearly 100%.

In other words, under this plan even a tiny country like Greece will be able to borrow and spend so much money that a default from them would absolutely shatter every capital market in the world. It wouldn't be like giving whiskey and the car keys to a teenager as much as it would be getting him hooked on heroine, and putting him behind the wheel of an Abrams tank.

When it finally blows up (and there is really no doubt whatsoever that it will) it will collapse into a singularity and suck the entire financial universe out with it. We'll need a bailout from Alpha Centauri if we go down this road. It will take a while - even the Greeks would need some time to tear through a Trillion dollars, there are only 10 million of them after all. But this plan is the thing I've heard that is most likely to ensure our total and utter global collapse. If they go through with it (which I admit is unlikely) then it's 15th century, here we come.