There’s been lots of chatter about Geithner’s suggestion that the Europe should leverage the European Financial Stability Facility.
Cardiff Garcia at FT Alphaville has an enlightening explanation of just how that might work:
From the way Reuters explains Geithner’s idea, while the EFSF would…offer some credit protection to the ECB, the ECB would obviously just buy the bonds itself from investors on the secondary market (as it recently did so controversially with Italian and Spanish sovereign debt).
But it’s not as if the ECB would be lending money to investors. The idea, we’re guessing, is for the increasing ECB purchases both to signal a price rise for these bonds and simultaneously free investor money for more sovereign debt purchases.
Such leveraging, the article explains, could actually pose a new credit risk but would allow the European Central Bank to stretch its balance sheet to buy more sovereign bonds. That is, if this is even legal.
Read the whole Alphaville article here.
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