Ponzi de Jour

If I'm losing control would you turn me away?
Or touch me deep inside?
And before this gets old
Will it still feel the same?
There's no way this could die
--Pat Benatar

The idea de jour in the EU crisis is to have governments borrow money from the ECB to buy assets (such as Greek bonds) from struggling banks. The vehicle for doing this is the EFSF (European Financial Stabilization Facility), which is a special purpose vehicle (SPV) established in 2010 and backed by EU country guarantees. The EFSF provides assistance to eurozone states in financial difficulty. The EFSF would essentially borrow using their country's assets as collateral.

The size of the borrowings necessary? Perhaps $1-2 trillion...

If this sounds like a version of TARP, then you'd be somewhat correct since the focus would be buying 'troubled assets.' In the case of TARP, however, government funds bought troubled assets from private sector banks. Under the latest EU plan, government money would be levered up with ECB money (more government money) to buy bonds from the same governments on the hook for the EFSF and ECB money to begin with.

How long before Mr Ponzi enters this discussion?

The only way such a program could be marginally effective is if Germany and France absorb an outsized share of the risk--well beyond what they have currently committed to contribute.

Which brings us back to the conclusion we've been reaching for months (here, here). Should Germany decide not to participate, then it all crumbles, cookie.

For today, anyway, markets were willing to look at the glass half full side of the story, with domestic markets up a couple of percent or so on the prospect of a $trillion EU bail out.

position in SPX