Wednesday, 26 November 2014

EU Add a Magic Money Multiplier to their Liquidity Diagram

The EU has announced a program to pump €315bio into the economy of Europe via a loan guarantee scheme. The actual amount they are stumping up is €21bio.
Full announcement here.


- That corporates want to borrow.
- That corporates are not lent to when they want to borrow.
- That corporates will spend borrowed money on things that are of benefit to others rather than just themselves.
- That if they are lent to and they spend on the right things the gearing for the economy will be 15x.

As I often have to say - "Assumption is the mother of all f**k ups"

It would appear that the sticking point is still within the corporates, who will be the recipients of this facility, where they need to spend on expanding their businesses. Providing yet more cheap credit for them to probably divert to M+A and share buy backs will be great for stock prices but doesn't necessarily mean that they are going to employ more people. The proviso that the loans are targeted at specific projects doesn't guarantee that project or finance substitution isn't going to take place within the recipient companies.

So here is the latest EU plumbing diagram with the EFSI and Magic Money Multiplier included.

Original diagram and explanation here


Post script.

I do hope that any natural recovery in the European Economy is not mistakenly labeled as the successful application of these homoeopathically small doses of EU quackery.


Anonymous said...

Yes, large corporates have easy access to financing, but try to get financing, on a non-recourse basis, for the construction phase of an off-shore wind farm, a tunnel, a hospital PPP,... and the reality looks quite different. Your analysis is simplistic.

Polemic said...

Anon , you are right, it is simplistic and I appreciate your points. Thank you.

Does this mean that Europe is going PFI over State projects? If so does it mean we can expect a later backlash over the deals agreed with the 'greedy corporates' over the deal structures as we have in the UK?

Polemic said...

And if it's going into Euro State funded infrastructure then it's time to revisit one of the great old Euro jokes. - (sorry i don't know who to attribute it to)

Some years ago a small rural town in Spain twinned with a similar town in Greece.
The mayor of the Greek town visited the Spanish town. When he saw the palatial mansion belonging to the Spanish mayor, he wondered aloud how on earth he could afford such a house.

The Spaniard replied: ‘You see that bridge over there? The EU gave us a grant to construct a two-lane bridge, but by building a single lane bridge with traffic lights at either end, I could build this place.’

The following year the Spaniard visited the Greek town. He was simply amazed at the Greek mayor's house: gold taps, marble floors, diamond doorknobs, it was marvellous.

When he asked how he’d raised the money to build this incredible house, the Greek mayor said: ‘You see that bridge over there?’

The Spaniard replied: ‘No.’

Juhani Huopainen said...

I just found your site (thx to FT's link). Excellent stuff. In the markets since 1991, so I appreciate your "cynical" attitude. Don't ever stop.

Polemic said...

Thanks Juhani. In that case we probably both funded the doorman of the Karlaa's yacht fund in the good old days. Good memories. Is it you who does morelivers?

Juhani Huopainen said...

Yep, Kaarle XII, or Kalle between friends. I never understood why I would want to get smashed at a place where everyone and their mother's would be seeing me, so I hung around hipster bars and clubs. But I did see the K. once or twice, though.

Yep, I'm ML.

Juhani Huopainen said...

I write on markets / central banks etc on several channels. The ML-blog is more or less just a personal diary for me (go through the newsflow, pick interesting articles, make a link). Sort of a market commentator's trading diary.

Anonymous said...

ML, how come you stroll outside NP town ? :-)

Anonymous said...

Polemic @13:02

From what I read and think to understand it is indeed more about PFI. State sponsored infrastructure investments where the state takes an equity piece in the cap structure or so the theory goes. Germany for example could need some investment in highways and bridges (the latter haven't been touched since the 1960s resp 70s and are in dire shape).

Can we expect a later backlash ? You bet ! Apart from the usual risk that costs will get beyond control (think BER) people will probably howl once they realize that corporates need to take a profit...

Juhani Huopainen said...

I haven't been on NP for some time now. While the atmosphere is A1 there, I am doing very little quant stuff nowadays. So more or less social media for me is bouncing ideas and insights for stories.