Mario Draghi, the new President of the European Central Bank, asked bankers at a conference in Frankfurt last week about the European Financial Stability Facility (EFSF) “… where is the implementation?” He wants to know why everyone is looking for the ECB to backstop the eurozone bond market. What happened to the EFSF borrowing $800 billion to lever up so they would have lots of dry powder?
We found out what happened. We reported the EFSF sold $4.2 billion in 10-year bonds two weeks ago. The UK Telegraph reported on the problems with the EFSF. With a touch of embarrassment, the EFSF admitted they had to buy some of their own bonds. About $400 million worth, almost 10% of the issue.
China and Japan had bought EFSF bonds a year ago when it was a backstop for the financial system. They are disappointed the crisis continues and the program is going to be used to guarantee bonds. They do not want to buy more. Current yields on EFSF bonds in the secondary market are 2% higher than German Bunds.
The market is pointing down this morning on continuing concerns over the eurozone and new numbers showing the U.S. economy is growing slower than previously thought. The third quarter GDP numbers were revised down this morning by the Bureau of Economic Analysis to 2%. Last month the government estimated third quarter growth at an annual rate of 2.5%
Mid-morning the market bounced on a FOX Business News report that the International Monetary Fund (IMF) was starting a new “Precautionary and Liquidity Line (PLL) that would be available to its members to act as “insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders.”
Loans will be offered on a one or two year basis and are available to any country with “good economic policies.” This made some traders giddy, until one of the talking heads on CNBC pointed out the IMF only has about $400 billion available. Not enough to make a dent on Italian debt.
There have been calls for the IMF to take on a greater involvement in the eurozone crisis. This is an attempt to tap deeper pockets than just those countries in the eurozone. U.S. Treasury Secretary Tim Geithner said the Europeans have the ability to solve their problems internally.
We see a grand bargain in the offing. Watch for the EFSF to loan money to the IMF with the IMF then administering the funds to buy sovereign debt. This will allow the EFSF to tap credit markets with a better credit rating on their bonds, and the IMF to play a bigger role than their balance sheet alone allows.
This also relieves the ECB of being the buyer “of last resort.” This is an elegant solution the bureaucrats will embrace. Watch for it to roll out in December. This program will be bullish. Buy your list of favored stocks during the next week or so while attractive prices present themselves. We know the present situation will have its ups and downs, but are confident the bureaucrats will do everything short of spending their own cash or retirement funds to save the eurozone.
Today’s quote can apply to our president and Congress, or eurozone countries that do not cut their budgets. Time eventually catches up with all.
Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusions of counsel, until the emergency comes, until self-preservation strikes its jarring gong – these are the features that constitute the endless repetition of history.”—Winston Churchill