Steen Jakobsen, chief economist of Saxo Bank in Denmark just pinged me with the following email comments “Leveraged EFSF deemed violation of Maastricht. The Master Plan is coming apart!

Steen offers additional background:


BRUSSELS—European officials debating ways to increase the effectiveness of their bailout fund are focusing on using the fund to provide collateral to back up bond issues by troubled countries, according to people familiar with the matter.

Lawyers for governments and European institutions have warned that using the bailout fund to provide direct guarantees would violate the European Union’s restrictions on bailouts, pouring cold water on the widely circulated notion that the European Financial Stability Facility on its own could simply stand as a guarantor for euro-zone bond issues.

Instead, under versions of the plan being discussed ahead of a critical weekend summit, these people said, countries who want to avail themselves of insurance would borrow an additional amount from the EFSF when they need to tap markets for financing. That extra amount would be kept aside to provide some compensation to creditors in the event of a default.

The collateral scheme would serve a similar purpose as the direct guarantee might have: giving investors an incentive to buy bonds from potentially-wobbly countries that need financing. The difference is that it would increase the volume of borrowing that those countries need to do.

An insurance plan of some variety would boost the effectiveness of the EFSF. That’s because insuring, say, 20% of a country’s bond issue consumes less of the EFSF’s resources than buying 100% of the issue outright. Such a boost is a key pillar of a comprehensive package of crisis measures that European leaders are trying to forge at a meeting here this weekend. French President Nicolas Sarkozy flew Wednesday to Frankfurt to meet with his German counterpart and other top European officials to try to reach a consensus.

France has favored a different method of boosting the fund—allowing it to act as a bank and finance itself through the European Central Bank. But the ECB and Germany have rejected that option. That leaves an insurance scheme as the main contender.

The other major pillars of the weekend package are a new bailout for Greece and a broad call for recapitalization of European banks. The countries appear closer on the bank issue, but it is not clear that they’ll be able to reach an accord on Greece.

“Merkozy” Master Plan Comes Unglued

The Merkel-Sarkozy “master plan” was nothing more than hot air all along. German Chancellor Angela Merkel and French president Nicolas Sarkozy hoped to put together a big bazooka by October 23 that would shock-and-awe the world.

However, that bazooka quickly turned into a pea shooter as noted in Bailout Campaign Bogs Down in Bickering; Dead Before Arrival?

Assuming the “Leveraged EFSF” idea is now dead, not only is there no bazooka, there is no pea shooter either.

Mike “Mish” Shedlock
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