Tags: Paulson | Europe | ECB | Firewall

John Paulson: Europe Needs ‘Firewall’ to Contain Crisis

By    |   Thursday, 15 Dec 2011 01:50 PM

Billionaire John Paulson says Europe needs a "firewall" to stabilize its volatile markets.

Paulson, in a Financial Times article, writes that “it is clear that existing, piecemeal efforts by European leaders have been ineffective.”

Paulson described Europe's credit markets as being in a “danger zone” but says a sovereign-debt guarantee program, acting as a firewall, could immediately calm them.
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Paulson points to Italy and Spain's need to borrow at sustainable levels, while highlighting that the ECB's bond buying has failed to hold down yields.

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(Getty Images photo)
The European Central Bank has propped up Italian and Spanish government bonds though purchases on the secondary markets since early August, the International Business Times reports.

Yet, the FT reported that Italy's funding costs reached a new euro-era record at auction on Wednesday, piling pressure on the new Rome government after last week's EU summit failed to convince markets the bloc's debt crisis can be resolved

Paulson also reminded readers of his FT article that despite Europe's efforts Greece, Portugal and Ireland still required bailouts.

Forbes.com confirmed Paulson's assessment saying “the crisis has steadily grown worse for more than 18 months despite every effort to limit its advance.”

But, Paulson's article didn't outline European failures without offering a solution.

He asked the ECB to consider a sovereign debt guarantee program, an idea he says was drawn from his firm's experience restructuring companies, along with lessons learned following the bankruptcy of Lehman Brothers.

Paulson was even kind enough to work out the details.

In return for a 1 percent annual guarantee fee, and compliance with the ECB and/or IMF on implementation of structural reform programs, Italy and Spain would be able to refinance all maturing debt with an ECB guarantee, he wrote in the FT.

This would probably cause their “all-in-financing costs” to fall to the 4 percent range. The program would be open for two years for maturities of up to 10 years, giving Italy and Spain time to implement their structural reforms.

Paulson claims the firewall would have many benefits. But even if it is the ultimate European solution, he it is unlikely to be put into action according to Forbes, which says “to date it seems that only the crisis getting worse will stir the ECB into taking on a broader role.”

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Billionaire John Paulson says Europe needs a firewall to stabilize its volatile markets. Paulson, in a Financial Times article, writes that it is clear that existing, piecemeal efforts by European leaders have been ineffective. Paulson described Europe's credit...
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Thursday, 15 Dec 2011 01:50 PM
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