More Trouble Ahead For European Credit Markets

This past week, we found out the Finns, worried about their money, had cut a parallel deal with Greece. "Prime Minister Jyrki Katainen “can’t back down on the collateral demand as his government would likely collapse,” said Timo Tyrvaeinen, Chief Economist at Aktia Oyj in Helsinki."

Now it is Slovakia's turn to throw a monkey wrench in the sophisticated machinery of the German-French designed EFSF (the stabilization fund hoped to lend money to Greece, Portugal, Ireland and every European bank while not costing anybody anything) (Slovakia's EFSF Vote Not Before December , Reuters)

If you are lost in the saga, which now rivals a Wall Street prospectus in complexity, here is a brief summary:

The EFSF was created as a huge fund of which only a fraction would be used to help small countries, such as Greece in their temporary plight for liquidity.  The facility would be guaranteed by all the euro-zone countries (the selfish English declined to help since the euro is not their currency). 

The crazy markets, instead of recognizing the error of their ways, decided to cast doubt on Ireland and Portugal, so the fund had to bail them out as well. 

After Ireland and Portugal were included in the deal, the EFSF needed more money in order to lend only a fraction.  Since many euro-zone governments didn't' want to commit more (a few of them do not believe it is a good idea to lend money to a country with a runaway deficit), the EFSF had to go all in.  Also, Greece needed a second (or a third?) bailout package.  Except some or all of this needs to be approved by every government in the euro-zone (believe it or not, it is not just Germany running things).  This still has to be done albeit at a European pace (they are only coming back from vacation tomorrow).

While the elite was enjoying their mandatory no-work August, the crazy markets, who do not take time off for some reason, decided to attack Spain and Italy.  At that time Monsieur Trichet, who was either left on guard at the ECB or can make decisions from his vacation spot, decided to buy Italian and Spanish bonds in the secondary market (i.e. from intermediaries who buy from the governments.  The ECB buying directly from the governments would be illegal.) on a temporary basis until the EFSF can be approved, funded, and ready to do its part. 

What happens next?

The ECB may redefine temporary and continue to buy Italian and Spanish bonds (It is already the most leveraged bank in the world by far)
Germany may decide to throw away the pretense of a European bailout and recognize they do not really need Slovakia or Finland (do they need France?)
Finland may be bribed to drop their collateral requirement (who really follows Finnish politics anyway?)
Or this may be the week when the crazy markets take over again

The bottom line is that nobody believes this will work unless the Germans agree to pay Greek debts unconditionally and that, as we know, opens yet a different can of worms.