In 2013 a 500 billion Euro “permanent” bailout fund (ESM) was slated to replace the 440 billion “Temporary” European Financial Stability Facility (EFSF) fund.

Via magic, the latest proposal that has the stock markets excited is to merge the two funds double counting the money (and then some).

Bloomberg reports EU Said to Weigh Combined $1.3 Trillion Fund

European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said.

Negotiations over pairing the two funds as of mid-2012 accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders.

Disclosure of the dual-use option helped reverse declines in U.S. stocks and the euro on speculation it could help break the deadlock among European leaders. Their wrangling led to the scheduling of a summit three days after an Oct. 23 gathering.

The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. It is slated to be replaced by the European Stability Mechanism, which will hold 500 billion euros, in mid-2013.

A consensus is emerging to start the permanent fund in mid-2012, the people said. During the transition between the two funds, euro-area governments originally agreed to cap overall lending at 500 billion euros, a figure deemed sufficient when Greece, Ireland and Portugal were the primary victims of the debt crisis.

Simple Math

  • The total overall cap is 500 billion Euros
  • 160 billion Euros has been spent
  • 340 billion Euros remains
  • 340 billion Euros + zero Euros = 940 billion Euros

Bear in mind this raises the permanent fund above the agreed upon amount. The German Supreme court has stated this cannot be done without a voter referendum.

Please see Germany’s Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

There is no way voters will approve this.

Also bear in mind the German Supreme court has ruled there should not be a permanent bailout fund at all. I am unclear if the ruling meant beyond the ESM or at all all. Either way, there should be a popular referendum on the matter, with an emphasis on “should be“.

Six-Day Marathon of Lies, Deceit

To ram this mathematically insane proposal through the Bundestag now requires a Six-Day Marathon on Greece, Banks

European leaders braced for a six- day battle over how to save Greece from default, shield banks from the fallout, and build more powerful defenses against the debt crisis rocking the 17-nation euro economy.

A falling-out between Germany and France has snagged the crisis management. French President Nicolas Sarkozy is pushing for the use of a European Central Bank role in boosting the firepower of the 440 billion-euro rescue fund, a measure opposed by Germany.

German Finance Minister Wolfgang Schaeuble denied a Berlin- Paris rift, saying Germany called for the second summit to give the government time to consult lawmakers.

“France and Germany are not at all stuck in their positions,” Schaeuble said.

Seven options are on the table for leveraging the fund, known as the European Financial Stability Facility. Germany and the ECB have ruled out granting it a banking license, the most potent option.

“New ones are coming into the process because smart people are looking for creative options,” Austrian Finance Minister Maria Fekter said in an interview. “None of the models are amazingly better than the others.”

ESM Term Sheet Details

Peter Tchir at TF Market Advisors sent a reference to the ESM Term Sheet from March 21, 2011.

As originally foreseen, the EFSF will remain in place after June 2013 so as to administer the outstanding bonds. It will remain operational until it has received full payment of the financing granted to the Member States and has repaid its liabilities under the financial instruments issued and any obligations to reimburse guarantors. Undisbursed and unfunded portions of existing loan facilities should be transferred to the ESM (e.g. payment and financing of instalments that would become due only after the entry into force of ESM). The consolidated EFSF and ESM lending shall not exceed € 500 bn.

Lies and Deceit Easy to Find

Lies and deceit are easy to find. The math alone proves as much. So does the attempt to skirt German constitutional law. Finally please consider the lie by Schaeuble “France and Germany are not at all stuck in their positions”.

Hopefully the German Supreme Court nixes this mathematical stupidity before it gets approved. If not, there will be a challenge.

Mike “Mish” Shedlock
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