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Since the logic if some members drop out is for that to push other Euro members into the position of marginal countries on the bubble, to be pushed out in turn, either the ECB accepts its inexorable return to being just the Bundesbank, except with all surrounding trading partners in a different common currency, or else it adopts the policies to change the rules.

The EFSF is already in that situation.

The EFSF has to source over 50% of its operating capital from "the markets" by issuing bonds backed by guarantees from Euro member states.

As member states get thrown under the bus they switch from guarantors of EFSF bonds to borrowers of EFSF funds.

Currently Spain and Italy are the marginal guarantors of the EFSF, and they are "under attack" by "the markets". Italy has suggested that it may exercise its option under the EFSF rules to withdraw its guarantee if its borrowing costs exceed those of Greece. The recent EU agreement allegedly lowered Greece's EFSF interest rate, while completely ignoring the fact that italy was, indeed, "under market attack".

In addition, France's AAA rating has become the subject of French Presidential Election Campaign Football, so whether France can continue to guarantee the EFSF's AAA rating is an open question, even if France continues to enjoy access to bond markets at reasonable rates.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Aug 1st, 2011 at 05:52:58 PM EST
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