According to a report in the Guardian, France and Germany are in agreement on a “comprehensive plan” that would boost the EFSF rescue fund to €2 trillion.This report suggests that a eurozone endgame may really be forthcoming at a summit of EU leaders this Sunday. The Guardian cites EU diplomats close to the negotiations as sources.
“Additional levers” will allow the EFSF to offer “first-loss guarantees” to bondholders, according to the report. Such EFSF leveraging would take the facility’s firepower from €440 billion to €2 trillion.
The bank recapitalization plan would take banks up to the 9% capital requirement that will be the threshold of the forthcoming European Banking Authority Stress tests. Sources indicated that the money needed to do this would be closer to €100 billion rather than the €200 billion suggested by IMF chief Christine Lagarde.
Eurozone leaders would need to endorse this plan on Sunday at their summit in order to put the deal in action.
Bank recapitalizations and EFSF leveraging have been seen as the two major components of a crisis endgame, but the devil with addressing the crisis has always been in the details. The Guardian report makes clear that those details are still up for debate, if not by France and Germany then by the eurozone leaders who will debate the plan on Sunday.
This report has sent markets skyrocketing, but it is too soon to tell whether it is valid or simply the latest in a string of rumours to surface about a eurozone endgame. There is a high likelihood that the plan is merely a draft in an unsolved project — in fact, we’ve seen this sort of rumour before.
Regardless, the news does suggest that eurozone leaders — particularly French President Nicolas Sarkozy and German Chancellor Angela Merkel — are closer to creating an actual plan that acknowledges the hard realities of the current situation. Bank recapitalization and EFSF leveraging have been unpopular topics, but this most recent report could indicate that Merkel and Sarkozy (at the very least) have acknowledged these steps will be necessary to fix the crisis.
UPDATE: Now there’s a Dow Jones report citing a source who calls that report “totally wrong.” The Dow just lost 90 points.
UPDATE II: We have no idea what to believe. Dow Jones is also reporting that there won’t be a deal on the EFSF until Friday, and that the Guardian’s €2 trillion figure is “simplistic.”
A deal on Friday would still be spectacular news for the eurozone.
That “simplistic” remark, on the other hand, seems ominous. We wouldn’t be surprised if this is all hype, and this rumoured agreement is either a sham or falls far short of a serious, long-term solution to the euro crisis.
UPDATE III: Now German Finance Minister Wolfgang Schaeuble is saying that €1 trillion would be the absolute maximum liability of the EFSF, according to FT Deutscheland. Even so, he did not directly rule out the idea of a leveraged EFSF.
That said, there’s evidently so much confusion around EFSF rules that some eurozone members will meet Thursday to its exact rules.
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