European Debt: A Potential Solution Being Considered

The current debate in Europe is how to use the European Financial Stability Facility (read “European Bailout Fund”).

The fund currently holds 440 billion euros (600 billion USD). Because 440 billion euro is seen as inadequate for Europe’s degree of debt, and because it is difficult for many countries to increase their contributions to the fund, officials have been debating ways to leverage the fund’s power. One proposal has been to use the fund to guarantee loans for investors who buy the debt of troubled countries like Greece and Italy. The fund would absorb all losses on these loans should they default. The purpose of this strategy is to leverage the funds limited resources, because it would guarantee bonds with an aggregate value much larger than 440 billion euro. This solution is similar to the Term Asset Loan Facility, an American effort put in place in the wake of the 2008 crisis that had mixed results. The fact is, this solution merely shifts the debt from European banks to taxpayers and does nothing to pay the debt down. FFP will be monitoring the situation closely as it unfolds from here, and recommends you do as well.