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Get ready for a bushel of "solutions" from EuroZone leaders--but will the market be impressed?
11/28/2011 5:30 pm EST
So to go along with the weekend reports that Italy and Spain were talking with the International Monetary Fund about potential credit lines in the hundreds of billions of euros, the market today is now hearing about:
- A German-French plan for a coalition of the willing to implement a tighter monetary union without the need for pesky and time-consuming changes to the treaties that govern the euro. The idea, call the Stability Pact—is modeled on the Schengen Agreement. In that agreement European Community members who choose to take part allow citizens of any country that has signed on to the pact to cross borders without checks or paperwork, but the agreement did not require all community member countries to join (and the United Kingdom and Ireland didn’t.) Countries that joined the Stability Pact would promise to meet standards of budgetary discipline and would face penalties if they didn’t. Apparently, France, which has been lobbying for more intervention by the European Central Bank in the crisis, believes that a promise of fiscal discipline might lead the central bank to reward members of the pact with greater support in the bond market. Of course, the bank hasn’t yet said that it would meet French expectations, and it’s not clear what countries would join the pact. Finland and the Netherlands, normally Germany’s allies when it comes to fiscal discipline, have voiced fears that such a pact, which would certainly not attract current euro members such as Portugal and Greece, would effectively mean the end of the euro. The German counter to all this is that such a pact could be put into effect in 2012 whereas any attempt to change the treaties governing the euro would stretch into 2013 or beyond.
- The 440 billion euro strength of the European Financial Stability Facility would be leveraged giving the facility the power to insure bonds of countries in financial distress with guarantees to 20% to 30%. The insurance would be in the form of tradable partial protection certificates that would be issued by an independent special purpose vehicle. This idea was relatively attractive back in July when it was first proposed and still relatively attractive in October, but now faces a major obstacles: With the continued erosion of the credit quality of Italy, Spain, Belgium, and France, it’s not clear how many bond buyers would be willing to trust a guarantee from the European Financial Stability Facility since that facility itself depends on the credit rating of EuroZone countries. The leveraged firepower of the facility is now clearly less than the 1 trillion euros mentioned by French President Nicolas Sarkozy when he championed this idea in October. Sarkozy then imagined five-fold leverage. The facility would now be lucky to get three-fold leverage.
- The European Financial Stability Facility would set up special purpose vehicles designed to attract private investors and sovereign wealth funds. This is another idea left over from October. The problem with it now should be obvious: In the midst of a euro crisis, investors aren’t exactly leaping all over themselves to invest in a euro rescue fund.
See anything here that’s innovative or especially promising? I don’t. (Which means that you can expect even more ideas in the next few days.)
But global stock markets were oversold at the end of last week and at current bond and stock prices traders are inclined toward hope that something will come out of the December 9 meeting. Even a denial today from the International Monetary Fund of the “La Stampa” report on a potential Italian credit line hasn’t been enough to damp the mood. The German DAX Index closed up 4.5% for the day, the French CAC Index closed up 5.3% and Spain’s IBEX 35 closed up 4.4%.
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