ENRON 2.0 - The EU Suicide Pact To Leverage The EFSF - Sovereign Debt TARP For Europe (CNBC - Steve Liesman)
We alerted readers Thursday night that this plan was on the way. The DOW rallied 270 points late today on news the EU is working to finalize a version of the Geithner plan presented to European leaders last week.
This is Europe making an 8 X leveraged bet on itself.
Summary quotes from Bloomberg:
- SPECIAL PURPOSE VEHICLE TO ISSUE BOND, BUY SOVEREIGN DEBT
- PLAN IS TO USE EFSF SEED MONEY FOR EUROPE INVESTMENT BANK
- EUROPE PLAN IS FOR SPV TO ISSUE BOND, BUY SOVEREIGN DEBT
- DETAILED PLAN IS IN WORKS ON LEVERING ESFS MONEY
- PLAN IS TO USE EFSF SEED MONEY FOR EUROPE INVESTMENT BANK
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The special purpose vehicle would issue bonds from investors and use the proceeds to purchase sovereign debt of distressed European states.
The hope is that this would alleviate the pressure on the distressed states and on the European banks that hold a lot of the distressed sovereign debt.
The bonds issued by the special purpose vehicle could then be used as collateral for borrowing from the European Central Bank (ECB), allowing the central bank to make loans to banks faced with liquidity shortages.
To put it more simply, banks loaded down with distressed sovereign debt would be able to sell the debt to the special purpose vehicle.
They would buy bonds of the special purpose vehicle, and those bonds could be used to access liquidity facilities from the ECB.
Although the structure is complex, the underlying result is relatively simple. Banks would essentially be allowed to exchange their sovereign debt for debt issued by a special purpose vehicle created by the European Investment Bank capitalized with funds from the EFSF.
In some ways, this resembles the original plan for the Troubled Asset Relief Program (TARP). As originally conceived, the TARP would have purchased "toxic securities" from banks. (This plan was abandoned when U.S. regulators concluded that it was too difficult to price the securities and that the plan would take too long to implement.) In this case, the "toxic securities" would be sovereign debt rather than mortgage bonds.
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EU Goes From Monetary Union To Suicide Pact
Via Peter Tchir of TF Market Advisors
As alleged details are leaked about an alleged proposal to leverage the EFSF all I can do is cringe. I'm waiting for some actual details, but as far as I can tell, Europe is attempting go all in. It is going to make leveraged bets on itself. If it doesn't work, the senior debt holders will own Europe if the BRICs buy the senior tranche and will end in a fast and furious death spiral if the senior tranche is owned by the ECB or European banks. We may get a lift on the news. We are trying to rally on the back of the news right now. But if this plan goes ahead, even the slightest cold in the future will turn into the plague. There will be no strong countries left as they will have tied themselves to the PIIGS anchor with a Gordion Knot that will never be untied in time.
Haven't they seen what happens to SIV's? Are the so confident in an economic recovery that will risk it all at this time? If they get it wrong and it doesn't work, there will be no fall back.
All I can hope is they are tired and too happy with the late night "solution" and the markets initial reaction that after the initial euphoria, cooler heads, like Schaeuble, will prevail. This has the makings of an Epic disaster in the making.
The plans to ring fence Greece, to erect support for banks and other countries all made sense. Painful, but made sense. If this even manages to avoid pain, it ensures the next crisis won't be manageable.
I do like the idea that the EFSF is going to become an "investment bank". At least it is consistent with solving every problem with more of the same. The best part will be when they pay up to poach talent from the banks that they are bailing out. With Gardening leave in Europe it should take about 6 months before the first employee can start.
I will take a look at the details but in meantime, for first time in this crisis, am worried that not only are they doing something that won't work, but something that will make the problem intractable and ensure that the crisis ends worse than anything we had post Lehman.
Sep 26, 2011 at 4:34 PM
Reader Comments (4)
Geithner Plan for Europe is last chance to avoid global catastrophe
Europe, the G20, and the global authorities have one last chance to contain the EMU debt crisis with a nuclear solution.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8788138/Geithner-Plan-for-Europe-is-last-chance-to-avoid-global-catastrophe.html
http://www.zerohedge.com/news/europes-latest-rescue-deux-ex-machina-cdo-squared
MOST Europeans do not like the way Europe is going anyway.
ONLY politicians want a Federal Europe, European citizens do not.
If total banking failure is the price for a non Federal Europe and the collapse of a politicians wet dream, then it is a price worth paying.
A total banking sector collapse is better than what is on offer right now.
The offer on the table right now is that ordinary citizens will pay for:
large bank bonuses
even larger bonuses in the future
larger profits for the banks and their owners
stripping of citizens voting rights
stripping of citizens pension
the introduction of a US style welfare system
the introduction of a US healthcare system
lower wages
longer working hours for the average citizen
more political/corporate corruption
etc.
So if anyone were to ask..
Stop bailing out the banks. Stop trying to create a Federal Europe.
If someone wishes to use the argument that wiping out Wall Street and the ECB will mean losing pensions etc.
So be it!
They robbed them already! The pot is empty.
Look people!
Why are the banks taking your money right now?
Banks are supposed to keep money in "reserve" so that when the shit hits the fan, there is money there.
But the banks spent the money they were supposed to keep in reserve!
They spent it on themselves and on bribing corrupt politicians, with no moral compass, to relax the bank laws so they could screw YOU over.
And when all this fucked up.. and exploded in their face??
They came to YOU for money to bail them out.
So let the bastards sink!
Let the banks collapse.
:-)