A good start to the week for anyone studying the FT Effect. Although in this case, the rally petered off by the close of trading.
The latest 3pm-ish scoop from the paper that keeps markets on edge for at least an hour a day:
Eleventh-hour negotiations have begun to create a much bigger financial “bazooka” to present at this week’s European Union summit that could include running two separate rescue funds and winning increased support for the International Monetary Fund.
This three-pronged rescue system would form part of a carefully crafted package EU leaders hope will win over financial markets, just two months after a similar summit failed to convince bond investors Europe could contain its spiralling debt crisis. The rescue system would be introduced alongside proposals to rewrite EU treaties with far tougher budget rules for the eurozone.
According to senior European officials, negotiators are considering allowing the eurozone’s existing €440bn bail-out fund to continue running when a new €500bn facility comes into force in mid-2012, almost doubling the firepower of the bloc’s financial rescue system.
Details are sketchy, the proposals are being worked on by mid-level staff, and the report says that “some northern creditor countries, where bail-out backlash has threatened to topple national governments, have shown reluctance.”
But to break this down, here are the new options under consideration, according to the report, with one more caveat that it’s entirely unclear whether any of these make it into the communiqué at the end of this week’s summit:
– The EFSF to be allowed to run side-by-side with the ESM rather than being wound down.
– Cash payments into the ESM to be sped-up.
– Following on from Monday’s Merkozy deal, private bondholders might be off the hook for losses — at least in theory.
There was also further discussion about whether the ESM would be allowed to access funding from the ECB. (No-one appears to have asked the ECB what it thinks.)
A few quick questions in response:
1) Presumably “northern creditor countries… have shown reluctance” includes Germany… so, um, is there any point discussing these ideas until that changes?
2) If the creditworthiness of the EFSF is more in doubt given the possibility that the countries backing it are at risk of a downgrade, how exactly would said creditworthiness be improved by the facility’s continuation alongside another facility of similar size? If someone offered you a product that you didn’t want, would you change your mind if they offered you more of the same product?
3) Given the discussion of changes to the ESM treaty, how will the rules governing each facility be standardised such that investors into the facilities can’t arbitrage among the two? Or are we missing something?
4) Selling EFSF bonds hasn’t exactly gone swimmingly thus far, and this proposal would effectively double the amount that would have to be raised. You can do all you like to the supply of eurozone bailout ideas, but if demand ain’t there…
5) WHERE WILL THE MONEY COME FROM?
Related link:
EU talks on doubling financial firewall – FT