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:
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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.