The EFSF: A €440 Billion He Said, She Said
Yesterday on CNBC, Steve Liesman reported that there are plans being discussed high up in the Eurozone about potentially leveraging the existing funds (some €440 billion) to shore up bank capital, in a plan very similar to the TARP program that was enacted in the United States back in 2008.
Essentially, Europe is having their 2008 moment right now and it is do or die.
In the report, Liesman reported that the fund would be levered potentially eight times, and that besides going to shore up bank capital, it would be used as seed money for a European Investment Bank. Liesman said, "[The] EIB would form a special vehicle, an SPV, that would issue bonds and purchase sovereign debt with the bonds it used so it would take the capital from the EFSF lever it up these bonds could also be used as collateral at the ECB."
There is a major vote on September 29 being held in Germany that would essentially kill or approve this plan, as the German government has to approve the legality of the EFSF.
After Liesmans' report, the markets surged, with the Dow jumping 272 points. Yet, if you believe UBS, and high ranking European officials, Leisman's report was a little too early, and may actually never happen.
Courtesy of a tweet from ZeroHedge, UBS came out and said last night that the rumors were nothing but just that, and nothing was even close to being done. In a note to clients, UBS wrote, "Selling pressures could easily overwhelm the modest buying-power of the EFSF (assuming its mandate to buy bonds has been approved) and could even challenge the ability or willingness of the ECB to engage in very large- scale bond purchases."
We have also seen various statements from European officials this morning that the EFSF plan is dead before it even gets started.
German Finance Minister Wolfgang Schaeuble said this morning that Germany will not spend its way out of the crisis, and that continues to be the public stance of the Germans. He said that "Immediate fiscal reforms are of the essence" and he also took a huge shot at U.S. Treasury Secretary Tim Geithner.
After the Delivering Alpha conference two weeks ago, Geithner was invited to go to Europe to help the Europeans try to solve their fiscal problems. He proceeded to give the advice that Liesman mentioned yesterday in his report, but was immediately refuted. Schaeuble took a pot shot at him, saying it is easier to give advice then to take it.
Schaeuble also seemed to back away from a levered EFSF, saying that monetary policy is not the answer to Europe's problems. Chancellor Angela Merkel has said the same thing over and over again, that she does not want an expanded EFSF.
This morning, the European Investment Bank announced that it has not been approached as part of a bailout program, and refuted the Liesman comments. In comments captured by Bloomberg, the EIB said, "There have been media reports about a potential involvement of the EIB in a special purpose vehicle in connection with the EFSF, for the purpose of bailouts. The EIB has not been approached and has no plans to be involved in this. The EIB will continue to focus on its mission which is financing viable investment projects."
The market wants either an expansion of the EFSF or the potential for Eurobonds. Merkel has vehemently denied this, and French President Nicolas Sarkozy was almost as staunch in his position, though he did say he could see the potential for Eurobonds down the line.
Financial markets are telling Europe that it has days, not weeks and months to get something done. The best way to solve this problem, according to the markets, is monetary policy. That is why we have seen a powerful equity rally since Liesman made the comments. It is either now or never.
The EFSF has turned into a €440 billion he said, she said with all of these statements every five minutes contradicting the last one.
Depending on who you believe, it is now or never. As a trader, yourself, who do you believe?
Traders who believe that the EFSF gets expanded might want to consider the following trades:
- We have seen a massive rally the past two days, and if Europe is able to solve its problems in the short term, there could be a massive rally in tech, commodities, and industrials. Consider names like Deere (NYSE: DE), BHP Billiton (NYSE: BHP), or Oracle (NASDAQ: ORCL).
Traders who believe that the EFSF expansion plan is dead on arrival may consider alternate positions:
- If Europe does not solve their problem within the next six weeks, Europe could go down in flames. Traders may want to look at shorting the Euro, which would almost certainly weaken if one of their member states defaults. Consider shorting CurrencyShares Euro Trust (NYSE: FXE).
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Spain's Salgado says plans to extend EFSF to EUR 2trl not on table Germany's FDP: "Merkel Should Make Clear Immediately That There Is No Change To The Business Model Of The EFSF" http://t.co/ECKFCHHx
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