This chart supplements the IREF article published on 24th July 2024 entitled ‘There is no European Financial Safety Net, and therefore no Global Financial Safety Net’:

https://en.irefeurope.org/publications/online-articles/article/there-is-no-european-financial-safety-net-and-therefore-no-global-financial-safety-net/

Bonds issued by the European Stability Mechanism have to be 100%+ backed by callable capital from member states with a given credit rating for the bonds to enjoy that same rating.

The European Stability Mechanism is meant to borrow, through the issuance of bonds, all the money it lends as part of the Eurozone bailout packages.

The European Stability Mechanism could borrow another €122 billion and retain its AAA rating, but after that things nosedive.

It would have to go through AA+ and AA and into AA- before picking up meaningful extra capacity – because the callable capital of France could be reckoned with.

The only other meaningful increases happen when Spain is counted in (rated A) and Italy (rated BBB). The scheme all but hits its ceiling when Spain’s capital is counted in and the European Stability Mechanism has allowed its rating to go down to Spain’s level – A.

With only an A rating the European Stability Mechanism’s bonds could not seriously be termed a ‘safe asset’. In fact anything less than AA- would surely test credibility, and might draw unwanted attention to the fact that all member state government bonds are weighted 0% for capital adequacy and 100% for Liquidity Coverage Ratio and Net Stable Funding Ratio, as long as they have ‘investment grade’ ratings, and magically they all do, even Greece.

So the European Stability Mechanism has a maximum firepower to support new bailouts of €310 billion, because AA- is the lowest rating it can contemplate for itself – and it had better hope that France does not suffer a further downgrade, €126 billion of the €310 billion evaporates, leaving just €184 billion.