Euro Zone to Quadruple Bailout Fund: Sources

4 posts / 0 new
Last post
Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Euro Zone to Quadruple Bailout Fund: Sources

http://www.cnbc.com/id/45049889

Euro zone leaders intend to scale up their emergency fund, the European Financial Stability Facility, to around 1.0 trillion euros, EU sources said on Wednesday.

The sources said the 440 billion euros ($611.4 billion) fund, set up last year, would have about 250-275 billion euros available after amounts are set aside for aid to Greece, Ireland and Portugal and for the recapitalizing the region's banks.

That amount would be scaled up around four times, arriving at a headline figure of around 1.0 trillion.

"The ratio of the leverage will be of at least 4 times," one source said, while another said the spare capacity available to be leveraged was 250 billion to 275 billion.

The exact amount of capital available will only be known once negotiations over a second bailout package for Greece are agreed. Part of the problem is agreeing on credit enhancements for the private sector. More credit enhancement will reduce the amount of funds in the EFSF for leveraging.

Meanwhile, reports also surfaced Wednesday night that French President Nicolas Sarkozy will speak with Chinese President Hu Jintao on Thursday about boosting the EFSF. Reuters and the Wall Street Journal both cited unnamed European Union sources.

dshields's picture
dshields
Status: Platinum Member (Offline)
Joined: Oct 24 2009
Posts: 599
LOL

They want the banks and other creditors to take the haircut on a "voluntary" basis.  That way it will not be considered a "credit event" and no CDSs will trigger.  Good luck with that.  Also, if this really happens it will gut the CDS market for sovereign debt.  No sense buying insurance against default if the governments can just claim it is not a default so your CDS(s) will not trigger.

 

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Law of unintended consequences...
dshields wrote:

Also, if this really happens it will gut the CDS market for sovereign debt.  No sense buying insurance against default if the governments can just claim it is not a default so your CDS(s) will not trigger.

Ain't that the truth.  Instead of dealing with a smaller scale sovereign default, taking some lumps and getting some needed experience on how to handle these, they dodge the bullet by rewriting the rules.  Now all long market participants are guaranteed to go into full panic sell mode at the first whiff of a problem because they know any CDS hedge they have is not worth the paper its printed on.

There seems to be only two explainations to me.  One, they are just clueless and are incapable of looking more than 1 move ahead at any problem.   Two, they know that any real disruption is going to take this whole thing down, so their only play is to put it off as long as possible and loot as much as they can, while they still can.  Are their any other explainations?

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
From 5 minute Forecast

http://5minforecast.agorafinancial.com/the-vapor-rally/

   “The announcement in Brussels poses more questions than answers, so it’s puzzling to see stocks soaring on this announcement,” says Strategic Short Report’s Dan Amoss, studiously avoiding any analogies to Ms. Lohan’s photo shoot.

“For one thing, the 50% haircut on Greek debt is closer to 30%, because it excludes debt held by the European Central Bank and the loans the EFSF (the eurozone bailout fund) has made to Greece since early 2010.”

“This cut in Greece’s debt is obviously not enough to put its economy on a sustainable footing. It will not stop the riots and strikes, and it will lead to another round of funding stress sooner than expected.”

   Then there’s the Humpty Dumpty nature of the announcement — which is extremely relevant to the health of U.S. banks.

“When I use a word,” said Humpty Dumpty in Lewis Carroll’s Through the Looking Glass, “it means just what I choose it to mean — neither more nor less.”

In the case of the news from Brussels, a 50% haircut on Greek government bonds is not — repeat, not — a “default.” Thus it does not trigger the credit default swaps that U.S. banks wrote on the European banks that loaded up on all those Greek bonds (and which said U.S. banks don’t have nearly enough resources to pay).

“This means,” Dan Amoss explains, “we could see some turmoil at big bank trading desks. Those parties who held both Greek debt and CDS will find that their insurance is not as valuable as they thought.”

“So EU bureaucrats, in their haste to ‘stick it to speculators and short sellers,’ may actually bring about a collapse in demand for the debt of other PIIGS countries, as CDS is no longer a reliable hedge.”

“If so, the need to refinance Italian debt would quickly burn through the €1.4 trillion ‘leveraged’ bailout fund.”

   One more problem: The aforementioned €106 billion the European banks need to shore up their balance sheets? “Most credible sources place the capital shortfall at more than five times this amount,” says Mr. Amoss.

“Plus, it’s unclear how banks are supposed to raise this capital, since most of their stocks are trading far below book value. They can’t raise this much in the private markets, so some form of ‘Euro-TARP’ or bank nationalization still looks inevitable.”

“Ultimately, the PIIGS crisis won’t be close to resolved until we see the ECB overtly or covertly monetize a lot more PIIGS debt. Such action would worsen the slow-growth, rising-inflation conditions facing the global economy.”

“In hindsight,” Dan concludes, “today’s rally will likely be seen as a knee-jerk reaction to an inadequate plan to deal with PIIGS insolvency. Like the initial rally in the wake of the late July EFSF announcement, today’s rally will probably fail quickly.”

 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments