One small snag with ‘Euro Plan C’: where’s the money?

Christine Lagarde, the IMF’s managing director, seems to have started from the same cheery position. Never mind that banks are on their knees and eurozone governments are out of money, “Take an enormous eurozone mega-fund…”

Three points can be made in favour of the hugely ambitious eurozone rescue plans now going the rounds. They are at least a recognition, albeit horrendously late, of the magnitude of the danger now facing the eurozone. It has taken blood-curling warnings from the IMF, the World Bank, the US Federal Reserve and other leading figures to induce some recognition of the scale of the crisis.

Second, it is an implicit admission that Greece is indeed going to default. Until last weekend the official line was that this would not arise. Now the issue is whether it will be orderly or chaotic. Thus we have travelled from Plan A – the first Greek rescue package judged fully adequate in May 2010 – through Plan B (a second rescue package in July this year) to Plan C, which is broadly quadruple the numbers judged to be even more than adequate less than three months ago. And finally, the euro-style “shock and awe” now under discussion has, if only momentarily, staunched the slide of confidence in global stock markets.

The plans now under consideration involve, in addition to a massive hike in the European Financial Stability Facility from €440 billion to €2 trillion, a 50 per cent write-down of Greece’s government debt (equivalent to 160 per cent of GDP) and a bolstering of big eurozone banks heavily exposed to Greek debt.

The huge uplift in the firepower of the EFSF is a direct copy of the US Troubled Assets Relief Plan wheeled out at the height of the financial crisis in 2008 and which US Treasury secretary Tim Geithner brought to the eurozone finance ministers’ meeting in Poland earlier this month. For that reason alone many eurozone leaders were loathe to touch it.

But even were this prejudice overcome, there are enormous obstacles in its implementation. The eurozone is not a transatlantic version of the United States but is comprised of 17 governments answerable to national electorates – a point the US view often fails to grasp.

The first obvious question is from where the magic trillions are going to come. The huge uplift in the EFSF cannot be financed through contributions by member states given the near-impossibility of winning parliamentary approval: for French president Nicolas Sarkozy as much as German chancellor Angela Merkel this would be an instant suicide note. Issuing Euro bonds has been touted as a means of revenue raising. But Germany is opposed and a key vote is due this week in the Bundestag on this issue.

This leaves the third option: giving the EFSF recourse to borrowing from the European Central Bank. But, as with Euro bonds, this is vulnerable to questions of legality. The move could be seen to drag the ECB beyond its competence into playing a quasi-fiscal role – undertaking a capital raising for governments through the back door.

Klaus Regling, chief executive of the EFSF, declared on Sunday that “there are serious concerns” that such a scheme wouldn’t be allowed under the EU Treaty, which forbids the ECB from financing governments directly.

In addition to all this, securing an “orderly” default requiring detailed negotiations between the Greek government, investment institutions, banks, other governments and public bodies, will be a horrendously complex task. Yet the hope is that these matters can be ironed out and that all of the eurozone’s national parliaments will agree on increased powers of the EFSF and the second Greek bail-out by mid-October, ahead of a scheduled meeting of the G20 in Cannes in the first week of November.

And through all of this, markets and investors are expected to be reassured by the same people with the same blind complacency who led Europe into this crisis in the first place. There needs, surely, to be a reckoning and a clean sweep.

“Take a dozen eggs…” doesn’t begin to convey the heroic ambition of the rescue on which the future of the eurozone now rests.