So, what of the European plan. First, it would appear that Europe is not putting up any money to save the system. Not one Euro as far as I can see. Clearly, the haircut on Greek debt is a "voluntary" agreement from bondholders in the private sector - no EU money there. On the bank recapitalisation fund, the EU are asking banks to raise new capital first from private investors, then from national Governments and then from the EFSF. With regard to the EFSF, this fund has no capital in the first place. It can raise funds from the markets because of a total of EUR780 billion in guarantees from the member countries. These guarantees allow the fund to lend a total of EUR440 billion which will be financed by borrowing funds from private investors.
Furthermore, out of the EUR440 billion of lending capacity in the EFSF, some EUR190 billion has been accounted for already with the bailouts of Greece, Portugal and Ireland. Therefore, only some EUR250 billion of lending capacity is left. This amount will be leveraged up to create a fund with EUR1 trillion of capacity for guaranteeing new sovereign borrowing (mainly Italy and Spain). So, here we have a fund that has no paid in capital that can guarantee EUR1 trillion of bond issuance to solve the Eurozone Sovereign debt crisis. The fact is that the debt that existed before the EFSF could not be serviced by Sovereign issuers (who collect revenue via taxation) and the thought that it can be solved by creating EUR1 trillion of new debt with no capital is fantasy, and this is why we believe the whole plan is nothing but smoke and mirrors.Stewart Richardson Chief Investment Officer of RMG Wealth Management