Tuesday, October 18, 2011

UK Guardian: France and Germany Ready to Agree to 2 Trillion Euro Rescue Fund

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The S&P 500 has rocketed here in the past 20 minutes or so (right at resistance as I type this at 1225-1235 area), as news reports surface of an agreement to lever that ESFS to 2 trillion Euro.  This has sort of been the same news we've been rallying on for over 2 weeks, but I guess this is a market where you buy the rumor, and the news.

(edit 3:30 PM  - if you want the Cliff Notes - essentially the ESFS will be used as an insurance fund, to absorb the first 20% of losses of European debt go forward.  Therefore as a private buyer you'd need at least a 21% haircut in say Portugal, Spain, or Italy's debt to begin taking losses.  Because the taxpayer would take the first loss.  That's how they are levering the 400B Euros into 2T.  Technically 440B Euro is in the ESFS but 40B already seems to be accounted for.  Didn't Germans approve the ESFS expansion on grounds it would not be levered just a few weeks ago?  Even though as they were voting everyone was already talking about levering it? Hear no evil, see no evil I guess.)

Details from the UK Guardian

  • France and Germany have reached agreement to boost the eurozone's rescue fund to €2tn as part of a "comprehensive plan" to resolve the sovereign debt crisis that the eurozone summit should endorse this weekend, EU diplomats said.
  • The growing confidence that a deal can be struck at this Sunday's crisis summit came amid signs of market pressure on France following the warning by ratings agency Moody's that it might review the country's coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone. The leaders of France and Germany hope to agree a deal that will assuage market uncertainties or, worse, volatility in the run-up to the G20 summit in Cannes early next month.
  • France would now have to pay more than a full percentage point – some 114 basis points – more than the price paid by Germany to borrow for 10 years as the gap between the two country's bond yields widened to their highest level since 1992.
  • On Tuesday stock markets and foreign exchanges reacted uneasily to the damping down of expectations, notably out of Berlin, about the prospects of a full-scale deal although EU diplomats close to the talks say the Franco-German agreement covers boosting the financial firewalls for eurozone members to withstand the threat of a "credit event" or sovereign debt default in weaker countries.
  • This takes two forms. First, the main bailout fund, the European financial stability facility, will be given additional levers enabling it to offer first-loss guarantees for bondholders, be they private or public. Senior diplomats say this will deliver a fivefold increase in the fund's firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will effectively become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.
  • Second, Berlin and Paris have agreed that Europe's banks should be recapitalised to meet the 9% capital ratio that the European Bank Authority is demanding following its re-examination of the exposure levels of between 60 to 70 "systemic" banks. The EBA has marked these exposures much closer to current market values.
  • It is said that the overall recapitalisation required will be closer to €100bn rather than the €200bn talked about by Christine Lagarde, IMF managing director, and others. French and German banks, senior sources said, can meet the new capital ratio target on their own without recourse to state funds, let alone the EFSF. Other countries' banks, however, may need financial support from the state or the EFSF.
  • Berlin and Paris are also said by those close to the negotiations to be edging nearer to agreeing on the increased scale of private sector involvement in the second rescue package (€109bn) for Greece. This was set at a voluntary 21% "haircut" in the July package but, under worsening overall economic conditions and a likely restructuring of Greek debt, Germany has been pushing for losses of up to 50%. France, backed by the ECB, has resisted the idea while EU officials have clearly indicated that a range of 30 to 50% is being considered.
  • Senior EU officials admit that technical details remain to be settled. Some of these will be agreed by finance ministers who meet on Saturday while others will await final agreement in the run-up to the G20 summit in Cannes. "It's a huge agenda," senior officials said of the plan of work for the summit. "But there will be a number of breakthroughs."
  • They added: "We thought the [Greek] package of 21 July was a big step but obviously it was not enough and now we're pretty confident that markets will say that these people really mean what they say and will ensure stability."

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