RBC Capital Markets has busted out the PowerPoint to depict the two ways EFSF could achieve the “several fold” leverage pledged last week by European leaders in Brussels. They may come in handy as you prepare to jet off to this week’s G20 summit in Cannes. (FYI: Unfortunately, no response yet from Paul Allen about our proposal to host a FT Alphaville party on his yacht.)
First, the EFSF as monoline idea (click to expand).
RBC isn’t smitten by this shade of pig lipstick — partly because it provides less leverage than first meets the eye, partly because the protection certificates continue to confuse, but mostly, it doesn’t like the look of its negative pledges:
Issues and open details: A major drawback is the risk of segmentation of secondary and primary markets. Despite the separation of PPC and the insured bond, the quantity of insurance certificates available will be insignificant compared to the debt outstanding. Furthermore, the MS’s [Member States'] gross debt would be increased due to the loans extended by the EFSF according to Eurostat definition. Lastly, and in our opinion most importantly, providing newly issued debt with PPCs would collide with negative pledge clauses of some outstanding debt instruments of MS (e.g., Italian EMTN, international bonds, and Spanish legacy foreign currency debt). Policy makers have already acknowledged this problem in a draft document that was leaked earlier this week and proposed an “extensive due diligence exercise similar to that being operated for the Greek PSI scheme” for MS using the bond insurance scheme.
Second, the EFSF CDO Spiv idea (click to expand):
RBC thinks more fondly of this model, perhaps because it’s unclear yet how it will work. It also makes the reasonable point that we don’t yet know who is going to pre-fund the equity tranche, at least not until later this week.
Until then, it’s at least nice to have an alternative to this sketch by an anonymous Brusselian: