I had a strange thought this morning, perhaps we should call the proposed European leveraged EFSF SPV raptor - or has that name already been used? The strategy throws around the idea of capitalizing a special purpose vehicle created by the European Investment Bank. This sounds vaguely similar to the disastrous slight-of-hand strategies of the past. While the details are in their infancy, the radical new measure seems to have helped market confidence with Asian regional equities higher across the board.
AUDUSD was able to break above 0.9867 resistance with the next critical level located at the 0.9930 bearish channel ceiling. Precious metals were able to find buyers with Gold able to hold above its 200ma after a worrying drop, which in turn pulled other commodities down with it. The primary objective of the SPV would be capitalized by the ESFS which in turn would issue bonds and then use the proceeds to buy sovereign debt. If markets can't see where things could go seriously wrong here...
We are skeptical that the current crisis is merely a liquidity issue which seems to be what this proposal would squarely address. The core problem in our mind with the leverage EFSF SPV strategy is that it fails to address the fundamental flaws in the economic union and allows policymakers to hide their skeletons in a bank that are not even exclusively owned by the Eurozone. In addition, the strategy hypothetically limits the effect on the ECB's balance sheet - which is the only thing keeping the union from going all Lehman on the global economy.
Given the comments floating around this idea, it appears that it more than just media speculation. ECB Executive Board member Bini-Smaghi stated that the current crisis calls for initiatives that outstrip the limits of the July EFSF agreement. He then added that talk around the use of leverage has already started and these EFSF assets could be used as collateral in ECB liquidity tenders (a slight shift in the view that the ECB wanted to stay clear of this strategy). Then again, today Spain's Economic minister Salgado stated that there was no plans to extend or enhance the EFSF.
Risk appetite is clearly the direction of the day. With significant drops in asset prices providing attractive opportunities for those that suspect that European policymakers have found the temporary patch that has guided them through the sovereign debt crisis so far. Alas, we suspect that the holes in the current strategy will emerge in the near term and risk reduction will once again dominate trading activity.
That said, should European policymakers continue to move boldly to support write offs of public debt, provide funds for bailouts to reach further financing needs and provide capital to prop up the region's fragile banking sector, longer term calm could settle over the markets. But the proposal needs to be comprehensive.
Today's light economic calendar will keep the markets contemplating the feasibility of the SPV and reacting to any headline grabbing comments. Interesting side piece today, Austria & Slovenia Parliaments' will vote on the EFSF's new powers which could set the stage for some divisive votes in Germany.