Two Interesting Analysis about the EFSF

This is a follow-up on my posts from last Thursday and Friday about the EFSF:

We are now starting to see the realisation that it's all smoke and mirrors and nothing has actually been accomplished...

Here a couple other comments from respectable market participants:

Hussman's comments on the EFSF:
So to start with, the EFSF is not actually an operating "bailout fund" at present - it's a shell corporation with a business plan and a certain amount of promised capital - not yet in hand - from European governments, in search of additional funding from private investors. 
Its intended business is to a) partially insure European debt, using capital from European governments, which these governments will obtain by issuing debt to investors, or b) to purchase European debt outright, by issuing EFSF debt to investors, leveraging capital obtained from European governments, which these governments will obtain by issuing debt to investors. 
In effect, European leaders have announced "We have agreed to solve our debt problem, leveraging money we do not have, to create a fund, which will then borrow several times that amount, in order to buy enormous amounts of new debt that we will need to issue." As Jens Weidmann, the President of the German Bundesbank objected about this plan last week, "It is tied to higher risks of losses and to increased sharing of risks. The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks." Moreover, the benefit to private investors is suspect. 
The basic idea of leveraging the EFSF is to provide enough "credit enhancement" to make European debt attractive. What is the value of that credit enhancement? Well, if the expected recovery rate is 80% or more, and the probability of default is fairly low, then the insurance (a promise to take "first loss" of 20%) isn't really needed in the first place. If you do the math, the expected effect on yields is something on the order of 1-2% on 1 year debt, and a fraction of a percent for longer dated debt. 
Unfortunately, when the insurance really is needed (assuming more typical recovery rates around 50% and default probabilities higher than 15% or so), a 20% first-loss provision does little but reduce an extremely high interest rate to a lower, but still intolerably high interest rate. Given debt-to-GDP ratios of 100% or more, that protection does nothing to avoid certain default except to delay it for a small number of years. 
On that note, don't look now, but even if you were to assume an optimistic 80% recovery rate, Portugese yields already imply certain default within less than 2 years. Assuming a more typical 60% recovery rate, the probability of a Portugese default within 2 years was 68% as of Friday (that same recovery rate produces an implied default probability of 88% within 3 years, and 100% within 5 years). 
Bob Januah, via M3 Financial Analysis:
This latest bailout relies on the market not calling what I see is a huge "bluff", because if the market does call it, the bailout simply won't be credible or even deliverable. It is instead akin to a self-referencing ponzi scheme, and I can't believe eurozone policymakers have even considered going down this route. After all, we all have recent experience of how such ponzi schemes end, and we all remember how eurozone officials often belittled and berated US policymakers for their role in the US housing/CDO/SIV financial bubble.

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