The eurozone Heath Robinson device
The indispensable Wolfgang Munchau in the FT calls (subscription) the idea of “leveraging” the European bailout fund, the European Financial Stability Fund, a “silly idea”.
That’s conventional wisdom since it became clear that the Chinese aren’t interested in putting up any cash.
But what exactly was the plan? We never got a clear explanation. The 26 October Brussels summit communiqué referred only to plans to:
“Maximis[e] the funding arrangements of the EFSF with a combination of resources from private and public financial institutions and investors, which can be arranged through Special Purpose Vehicles.”
That’s unhelpful. How exactly would this work? Who would bear the risk?
Well, the analysts at Commerzbank have come up with a flowchart to explain what they think the plan really was:
So there would be a new fund established, here described as a Co-Investment Fund (CIF). This CIF would buy up the bonds of distressed eurozone sovereigns such as Spain and Italy. The CIF would be funded by there sources: 1) the EFSF, 2) sovereign wealth funds and 3) traditional private bond investors.
The EFSF would take the first loss if the CIF lost money on the eurozone sovereign bonds (ie if Italy or Spain etc defaulted). Asian sovereign wealth funds would be next in line to take a hit. Finally, normal bond investors, such as pension funds etc, would be sitting in the comfortable seats, more or less fully protected.
The goal was to convince panicking traditional bond buyers that their money would be safer invested in eurozone bonds through the prophylactic of the CIF.
Would it have worked if the Chinese had agreed to play ball? Take a look at that flow chart and decide for yourself. If someone presented that to you and asked you to invest what would you say?
Perhaps you would prefer to invest in something a little more straightforward:bonds, Brussels, Chinese, EFSF, Heath Robinson, Special Purpose Vehicle
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