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Monday, September 24, 2012 10:50 AM

Proposal to Leverage ESM to 2 Trillion Euros; Is Merkel's Rubber Stamp Ready?

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Now that Merkel has caved in on virtually everything else, is it time for her to cave in on use of leverage for the ESM?

Please consider German deputy minister says ESM leverage being discussed.

German Deputy Finance Minister Steffen Kampeter said on Monday there is a discussion going on in Europe about leveraging the new permanent bailout scheme for the euro zone - and he promised that Germany's parliament would be consulted.

"If Europe decided to leverage the ESM (European Stability Mechanism) - and this discussion is going on - we would of course involve the German Bundestag (parliament's lower house)," Kampeter told Reuters.

Spiegel magazine reported in its latest edition that the euro zone wanted to leverage the ESM for a total capacity of more than 2 trillion euros, in a similar arrangement to that involving its predecessor, the European Financial Stability Facility (EFSF).
Merkel's Rubber Stamp Ready?

Regardless of what she says right now, it is highly likely Merkel's rubber stamp is ready. If so, consulting the German Bundestag is rather like asking one of those black eight ball devices a question, but the only answers are yes, and maybe. In this case, the nannycrats will keep asking until the answer is yes.

The ESM is supposed to have €500 billion of firepower of which Germany's contribution is €190 billion. The nannycrats want to leverage that to €2 trillion. If they do, losses of 25% will wipe out the entire ESM.

Yet, if Spain, exits the eurozone (which I still think is highly likely) losses will far exceed Germany's commitment.

On September 12, the German constitutional court foolishly approved the ESM, warning German parliament must approve any increase in Germany's ceiling of €190 billion.

How is that horse out of the barn exercise going to work, once losses exceed €190 billion?

Not to worry, if Merkel signs off on use of leverage, her rubber stamp approval for even bigger losses must be ready by function of math. There won't even be a need to vote, the losses will be immediate and realized.

Mike "Mish" Shedlock
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