Here’s a scoop from Reuters on the transmogrified European resurrection of an idea we thought we’d seen the last of (and which will be sure to raise the hackles of hawkish central banking types):
U.S. Treasury Secretary Timothy Geithner is likely to suggest to European finance ministers on Friday that they leverage their bailout fund along the lines of the U.S. TALF programme, EU officials said.
A quick caveat here: the three”EU officials” cited by Reuters are anonymous, so tune in tomorrow for confirmation.
Thankfully for the sake of pretty much everyone involved, the parallels between this idea for Europe doesn’t seem too much “along the lines of the US Talf programme.”
Talf, you’ll remember — and as wonderfully explained and pilloried by Tracy Alloway — involved the US Treasury offering credit protection to the NY Fed, which then loaned out money to investors with the explicit intent of using the loans to buy asset-backed securities.
But the design was deeply flawed — not least because the loans were non-recourse, meaning that borrowers could simply default, surrender the crap ABS collateral, and walk off into the sunset with nary a remedy for the Fed to pursue.
A truly shining example of private upside, public downside — and cue the mysterious and opaque collateral judgment process, the occasional bunk collateral acceptance, plus a fun Matt Taibbi article two years later.
(And by the way, we might have missed it, but are we still waiting for the Fed to let us know which borrowers did in fact default, as requested by Sigtarp back in 2009?)
Anyways, the end goals of Talf and the expected Geithner idea for Europe are kinda similar — just substitute sovereign debt revival for ABS. But, crucially, there’s one less step in the process.
In the original, the US Treasury gave some limited credit protection to the Fed, and the Fed would take a haircut from investors on the collateral posted. The idea was to encourage investors to keep buying ABS, and this would further encourage lending down the chain until it reached the level of the consumer. Credit revival 101.
But from the way Reuters explains Geithner’s idea, while the EFSF would similarly offer some credit protection to the ECB, the ECB would obviously just buy the bonds itself from investors on the secondary market (as it recently did so controversially with Italian and Spanish sovereign debt).
But it’s not as if the ECB would be lending money to investors. The idea, we’re guessing, is for the increasing ECB purchases both to signal a price rise for these bonds and simultaneously free investor money for more sovereign debt purchases.
This whole thing is being sold as “leveraging” the EFSF, which is naturally potentially another credit risk bearing down on it. (Let’s assume for example that recovery values in a sovereign default, versus ABS defaults, are pretty different.) On the other hand, it’s effectively allowing the ECB to continue using its balance sheet to finance asset purchases.
We have no idea if such a thing would — or, given the legal and institutional barriers as mentioned in the Reuters article, even could — work. A lot depends on the amount of credit protection offered, quality of the specific bonds purchased, etc.. But it doesn’t look so bad in comparison to its US predecessor. This isn’t hard of course.
So if Geithner’s gonna pitch it, we’re not so sure that analogising it to Talf is such a great idea….