Continuing with our theme of the morning on possible bad outcomes in Europe, we wanted to pass along this note from Cagdas Aksu at Barclays titled: Eurozone Rescue Funds: Limited buffer in a pessimistic scenario.
The basic idea is that all these rescue funds that they have (EFSF, ESM, etc.) will prove to be a joke if things get bad.
For example, there’s now 500 billion EUR from the rescue funds, and $430 billion committed from the IMF, but if the contagion were to aggressively spread to Spain and Italy, they’d be wiped out, as this table nicely shows.
Now there is the possibility of juicing a little more, as Barclays notes, and it’s for this reason that they think we’re not going to see the extreme bond market rout that we saw last autumn. But ultimately these “firewalls” in place are really thin buffers that might not do very much.