Is the Euro Zone in such a bad economical shape that the suggested Fiscal Union governed by the European Financial Stability Facility (EFSF) promoted by Germany and France the 9th of December 2011 nothing else than a Ponzi Scheme to keep the Euro and the European economic running?
This is an allegation which I will try to explain.
First what is a Ponzi scheme; or what is the significance of a Ponzi scheme?
Basically a Ponzi scheme is a financial transaction to lure funds away from victims into the pocket of the schemer by offering the victims a very high return on investment. The interesting part for the schemer is to get a substantial amount of funds into the scheme to be able to pay the high return of investment until the schemer can with draw the most of the funds for him and close the scheme. The nature of the Ponzi scheme relay on the following:
- A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors.
- A Ponzi Scheme, the schemer acts as a “hub” for the victims, interacting with all of the victims directly
- Ponzi Schemes can survive simply by persuading most existing participants to reinvest their money, with a relatively small number of new participants.
How can this fraud scheme be assembled with the EFSF?
EFSF mission is to authorize;
· Issue bonds or other debt instruments on the market to raise the funds needed to provide loans to countries in financially difficulties.
· Intervene in the debt primary market
· Intervene in the debt secondary markets
· Act on the basis of a precautionary program
· Finance recapitalizations of financial institutions through loans to governments including in non-program countries
The EFSF should assist member states that are in financial trouble but under appropriated conditionality. This is not an organization we will normally assemble, with a private Ponzi scheme like the one Mr. Madoff made in the US.
According to Mario Beljer a former governor of Argentina’s central bank and director of the Centre for Central Banking Studies at the Bank of England the resemble of the situation acting in EFSF and the Ponzi scheme, lies in how some of the original bondholders are being paid with the official loans that also finance the remaining primary deficits. When it turns out that countries like Greece, and next Portugal and Ireland cannot meet the austerity and structural conditions imposed on them, and therefore cannot return to the voluntary market, these loans will eventually be rolled over and enhanced by the Euro Zone members and their organization EFSF supported by IMF. As the financing of EFSF demands new members or more funds from the existing members who are still able to pay, two possibilities are in play:
· The existing Euro Zone members could ask for extra tax money to continue the bad dept members over expending.
· The existing members can choose to “invite” new members into the Euro Zone fiscal union and participate in funding the bad debt members.
The “public sector Ponzi scheme” shows when Germany and France invite the non Euro Zone members to participate in the Fiscal Union and herby support the EFSF with extra funds. Looking into the funding of EFSF there is no doubt that Germany and France want to diminish their part of the total funding of EFSF. The brilliance of a “public sector Ponzi scheme” is that it is far more flexible than a private one. As long as the “public” scheme continue to be financed with public money the peripheral countries debt could continue to grow without a limit. The public Ponzi scheme could just increase the taxes and herby get continues funding or invite other public members into the scheme. A private Ponzi scheme will collapse when you cannot find enough new investors willing to use their funds in the scheme so old investors can be paid. Even though in theory the public Ponzi scheme could continue in the infinite, the national governments have started to see a public opposition to financing this Ponzi scheme in its current form, which is quite obvious in Germany and France who are the creators of the fiscal union plan and EFSF new tasks. It is obvious that this Ponzi scheme will only be allowed to take place when the vast part of the European distressed debt is transferred from the private to the public sector. The looser of this Ponzi scheme will be the last holder/countries of the “asset” that takes the full loss. In the EFSF case it will be the taxpayer of the participating countries that foots the bill, rather than the original bondholders that made the wrong investment decisions.
What does this lead to?
When the invitation to the 10 non Euro Zone members has been issued from the leading Euro Zone members –Germany and France – they have to watch out for not being the last holder of the “bad asset” because they will take the full loss. Participating in the funding of EFSF will be writing a support check to the Euro Zone members saying “we will continue to support you weather you act in good faith or you just let go and continue to consume without the financial cover for your consumption”. In short this is a plan which could lead the 10 non Euro Zone members into the same bad shape as the Euro Zone countries are facing. The plan will not save the Euro, nor the bad shape of the indebted countries in Euro Zone. It will just prolong the pain and get everybody in EU in bad shape. The structural problems have to be solved before you continue to finance a bad debt.
