Thursday, September 15, 2011

Tim Geithner to Introduce "Bigger Bailout" Policy to Europe - Markets Rejoice

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Well if anyone knows how to do a bailout, dripping with moral hazard, it is the United States of Bailout.  So when in need of how to design the biggest baddest bailout, you bring in the expert.  Markets are excited as Tim Geithner travels overseas with plans to teach the Europeans on "how to do it right".  Looks like he has a kindred spirit in the new head of the IMF as well.  All the 'free market capitalists' (free markets on the way up, intervention on the way down) are rejoicing.

  • Treasury Secretary Timothy Geithner will discuss with European finance ministers the possibility of leveraging the euro zone's bailout fund to make it more effective in fighting the debt crisis.
  • Geithner will hold talks with EU ministers in Poland on Friday and will propose that the EFSF, the 440 billion euro fund set up in May 2010, be used in a similar way to an emergency fund created by the U.S. Treasury and Federal Reserve in 2008 to handle the subprime crisis, sources said.
  • In a sign of the risks to banks and the world economy associated with Europe's escalating debt crisis, the European Central Bank, the U.S. Fed and other major central banks agreed on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.  That news sharply boosted European bank shares and the euro. Shares in French bank BNP Paribas jumped as much as 13 percent.
  • "Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official told Reuters ahead of the meeting in Wroclaw, Poland.  "The leveraging of the EFSF -- I think this is something that he will put on the table," the official said. "There could be some openness to the proposal."
  • The model for the Europeans would be the Term Asset-Backed Securities Loan Facility (TALF), which the U.S. financial authorities used to jumpstart the asset-backed securities market, which was frozen at the time and stalling recovery.
  • Under TALF, the New York Fed, where Geithner was previously president, lent out up to $200 billion, taking asset-backed securities as collateral with a haircut, and the U.S. Treasury in turn offered $20 billion credit protection for the Fed.
  • While it remains unclear how the EFSF could be leveraged, one analyst said its funds could be used to guarantee a portion of potential losses on euro zone sovereign debt, giving it more clout than if it just bought the bonds in the secondary market.  "It is possible to leverage the EFSF so as to expand its headline capacity to support sovereign bonds, for example through the use of partial guarantees against first losses," said Sony Kapoor, managing director of think tank Re-Define.
  • One difficulty is that leveraging a fund that is underwritten by guarantees from euro zone member states could increase liabilities across the board, putting pressure on the triple-A credit rating of countries such as France.
  • In Washington, IMF chief Christine Lagarde urged advanced countries to take bold steps to break a cycle of weak growth and high debt that threatens the global economy. "Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward," she said in a speech ahead of the IMF and World Bank meetings of global financial leaders next week.

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