In his Bedtime With BTIG note, Mike O’Rourke makes a fantastic analogy between TARP — which morphed from a vehicle to buy up troubled assets to being one that invested directly into banks — and the European Financial Stability Fund.
Like TARP, the EFSF, is morphing, and if it’s anything like TARP it may at once be reviled and wildly successful.
Here’s part of O’Rourke’s note:
We are starting to see signs of history rhyming. Just as TARP was used as a tool to fight fires where policy makers saw flare-ups, European policymakers now have an operational tool of their own. They are examining the flexibility and potential options offered by the program to combat the sovereign debt crisis. Last week, there was speculation that the EFSF would buy a portion of the troubled sovereign debt on the open market, reducing the face value outstanding and helping to deleverage the troubled nations. The latest potential alternative was suggested by ECB Executive Board Member Jürgen Stark, who was quoted in the Dutch press as commenting that “On the qualitative side, I could imagine the EFSF recapitalizing banks or buying sovereign debt.
But this issue has to be decided at the political level.” The “mission creep” is beginning. People will debate whether it is right or wrong to deviate from original design, but the simple fact is policy makers are big beneficiaries of flexibility and multiple options. The implementation of TARP was not pretty, and the Eurozone members have the luxury of a much longer lead time in this crisis developing. One could argue that Ireland’s bailout request may have placed the Eurozone in a stronger position to respond because bailing out a smaller nation has put the response infrastructure in place. Having the EFSF up and running permits policy makers to examine their alternatives in a practical manner.
In a world where failure is not an option, now that they have the unified tool they need, we would not be surprised if the EU leaders morph it into a tool to suit any need.
Combine a robust EFSF with an ECB chief who’s sounding more and more hawkish by the day, and it’s not hard to figure out why peripheral debt and the euro have been rallying, even if the long-term structural issues remain.
Meanwhile, MNI has a good EFSF update… the latest is that there’s no interest in expanding it, but there is talk of using the whole thing, and keeping options flexible.
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