Van Rompuy And Barroso Announce €440 Billion EFSF Fully Functional; Now, How Do They Expand It To €3 Trillion?
Submitted by Tyler Durden.
Following the Slovak approval vote earlier, the EFSF is now fully functional, or so say Europe’s two unelected leader Herman Van Rompuy and Jose Barroso (full statement here). Which is great, considering it only took Europe 3 months to ratify something that was supposed to be operational 2 months ago, and take over for the ECB’s SMP declining bond purchases sometime in mid-September. And now, as Zero Hedge explained back in July, comes the hart part where the Eurozone realizes that the EFSF, which recently has found it has more uses than a Swiss Army Knife and can be used as a central bank, as a guarantor, as an insurance policy, as a CDO squared, cubed, etc, etc, or at least so the rumors go, has to be expanded from $440 billion to €3.5 billion. Recall: “slowly the sell side is coming to the realization that not only will the EFSF have to be expanded (that much was known), but that Germany, and specifically the outright economy, will be on the hook by an unprecedented amount of money. And expanded it will have to be: not by two, not by three, but by a cool four times, to a unbelievable €3.5 trillion which according to Daiwa’s Head of Economic Research, Grant Lewis, is an act which will be necessary to convince financial markets of euro area resolve to save Italy and Spain.” That was two months ago. Finally, the governments, which back then religiously denied such reporting as scaremongering, are getting on the bandwagon. It was none other than Le Figaro, mouthpiece of the country that has the most to lose from the inability to ringfence a Greek fallout, that said yesterday: “The euro area reflects one of several options to increase by up to five times, or more than 2500 billion euros, the firepower of its relief fund for countries in financial difficulty (EFSF), said on Wednesday AFP European sources.” In other words, the target number is now known, and nobody is ashamed to put it out there: between €2.5 and €3.5 trillion. The only question is what form it will take: yesterday it was a bank, today it is an insurance “fund”, tomorrow who knows – gotta keep those rumors a surprise after all: they don’t call the EFSF the modern version of the Swiss Army Bailout knife for nothing.
And since the rumor du jour, until it is formally rejected by the market as impractical, is the use of the EFSF as an insurance net, here is Dow Jones with its take:
France said Thursday that allowing the euro-zone rescue fund to provide insurance on bonds issued by countries that cannot tap markets is one of the options being considered to increase the vehicle’s firepower, as the bloc seeks to reassure investors that it can deal with the fallout from the deepening sovereign debt crisis.
France favors turning the euro zone’s bailout fund into a bank that can easily leverage its resources, but recognizes there is strong opposition to
the idea, a senior French official said Thursday.
“The best option is still that the fund becomes a bank…and acquires leveraging capacity,” the official said, speaking ahead of the meeting of finance ministers and central bankers from the Group of 20 industrialized and developing countries. “It’s an uncertain hypothesis because the ECB has already given a negative opinion.”
If the EFSF were to operate as a bank, it could buy sovereign debt and use that as collateral to borrow further funds from the ECB. Germany opposes allowing the bailout fund to tap ECB funding, because it fears it would place too many risky assets on the central bank’s balance sheet.
Faced with the stiff opposition, other ideas are making progress in euro zone negotiations, including using the EFSF to insure bonds or bringing in the support of other European or international funds, the French official said. The official did not go into details on how other funds could be brought in but said the bond insurer idea is known to be effective. “It’s part of the hypothesis that we’ve been discussing and working on,” the official said. “It’s a system that works well…which can encourage foreign investors to return to the euro zone and would be a deterrent form of leverage.”
A proposal put forward by German insurance giant Allianz SE (ALIZF, ALV.XE) estimates the fund could cover EUR3 trillion of bonds if some 20% of debt issued is insured. It was unclear if the French official was referring to the Allianz plan.
And so on, and so on, all in keeping with whatever is the ridiculous meme du jour.
The only problem, yesterday, today and tomorrow, is the open answer to the question of who will pay for this €2.5-3 trillion rescue net? Because we now know that China, which is busy bailing out its own banking system is out of the picture, while the US has its own major problems – the last thing the Fed needs is for the general populace to realize the Fed is once again directly bailing out failing European banks, like it did with Dexia.
So, once again: who pays for this wacky, wonderful, rumor mill, which is the only thing that drives markets these days?