Global Markets Rally on Debt Plan for Eurozone

by Marilou Moursund on September 27, 2011

in Banks,Credit Crisis,Debt,Foreign Markets,TARP

Pressure mounted on European leaders over the weekend to come up with a plan to deal with Greece’s near term cash flow problems as well as the longer term sovereign debt problems of the rest of the Eurozone. The current thinking is that the ECB will institute some kind of program like TARP to stabilize the banking sector in Europe. Their program is called the European Financial Stability Facility, or EFSF. However, there is still much disagreement among the various countries over how to implement the program.

There is also discussion/rumor about the ECB issuing some kind of bonds to raise capital for the system. From Ed Yardeni this morning:

Yesterday, I wrote that Europeans are working on Plan C to rescue Greece and
expand the power of the European Financial Stability Facility (EFSF). This
morning’s FT reports that they are discussing at least five different
proposals on how to leverage the EFSF: “One proposal is for the EFSF to
guarantee losses of up to 20 per cent on sovereign bonds, for example of Spain
and Italy, rather than buying the bonds outright. Such insurance would increase
the value of EFSF support by five times and

avoid upfront payments. Another
variant would speed up by a year the creation of the EFSF’s replacement, the
permanent European stability mechanism, which was originally to come into place
in mid-2013.” The S&P 500 rallied yesterday by 2.3% to close at 1162.95.
Boosting the market was a CNBC report in the afternoon that a deal had been
reached among euro zone leaders to leverage the EFSF by allowing it to issue
special securities. So far, that has not been confirmed.

Note the use of the word “leverage”. I’m not sure that using more leverage on debt is a wise course to solve the problem of too much debt.

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