In the wake of the Greek default, has the EFSF lost its ability to drive down bond yields of peripheral members?
When the Eurozone decided to impose loses on private creditors, and private creditors alone, I think it lost any ability to help its member states finance themselves. Because the more bonds the EFSF buys, the more bonds are ring fenced from write offs, and the higher the write offs for private creditors have to be in order to get sovereign debt down to a level that can actually be payed.
Whenever the IMF or the EFSF purchases bonds, it automatically decides its going to be senior to all other creditors. And everyone who already owned the debt suddenly finds themselves in a lower tranche. I don't think people want this kind of "help".
Rather than driving down bond yields, when the EFSF buys bonds of a country, its yields should go up. If Greece owed me money, and it was lent money from Germany, I would worry for the same reason I would worry if Greece was lent money by a loan-shark. If its not going to pay somebody, its the person who won't break their legs.
If the EFSF is going to buy bonds, it should buy them after a default, not before. Or, preferably, it should have accepted the same losses as it forced on private creditors. That would have assured the markets that there would be significant political pressure against defaulting. Or best of all, buy Greek debt and burn it in exchange for reforms.
