It sounded like a really neat idea. Rather than guaranteeing the whole of the debt of a wobbling eurozone state, why not just indemnify the buyer against the first 40% , or even just 25%, of any loss? This way, the EFSF fund, currently proposed at E440 billion, could be made to cover twice, or even four times as much debt. The EFSF metamorphoses into the ESIM, with enough firepower to restore confidence that it is big enough to cope with Greece, Portugal, Spain and Italy, and anything else the markets throw at it.

Unfortunately, few things in life are free, and a guarantee which seems so cheap when given can exact a terrible price later on. There’s an excellent analysis here of why this plan won’t get off the ground, even if it gets onto the runway. As the author, Tamara Burnell, points out, it’s an insurance proposal, not a banking one, and as anyone who has made a claim knows, dealing with insurers is seldom straightforward.

Before you buy a policy, you need to be confident that the insurer will at least have the money to pay, even if he lacks the will. The ESIM would be a Luxembourg domiciled private company whose principal asset would be the right to call on euro member states for money in a crisis. A crisis is, of course, precisely when they are least able to stump up, and even those who can (let’s call them “the Germans”) may lack the political will to do so. As Ms Burnell points out:

Investors are hardly likely to trust that Spain will be willing or able to honour its guarantees to the EFSF in a scenario where Italy defaults, for example.

Quite.

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