The new Special Purpose Vehicle (EFSF) was explained in greater detail today but is still not totally clear as to its operation. What we do know is that the EFSF will be able to lend to troubled nations at a much better rate then the stressed debtor would be able to borrow on its own. The facility will be backed by the pro-rata guarantees in reference to its capital base and weighting in the ECB. By clubbing together, the Europeans will be able to issue joint bonds backed by lots of collateral, thus giving credibility to the EFSF. It is believed that the EFSF will be AAA-rated because of the underlying soundness of the non-profligate. Also, the fund can only be tapped by the nation in stress after it has agreed to substantial changes in their economy in order to correct the imbalances.
In a Financial Times article in tomorrow’s paper, Gillian Tett raises some issues about how the EFSF will work in actuality. It has yet to be determined where the debt that is issued by the EFSF will stand in seniority to existing sovereign debt, so our readers can understand that this is certainly a work in progress. But with strikes today in Spain–although not as big as anticipated–a ready liquidity source is going to be needed to relieve the extensive pressure from the proposed austerity plans being put forward by several European states. The proposed fiscal austerity is causing Tim Geithner great unease as the global economy has not yet gained its footing and the move to remove any type of stimulus too early can wreak havoc. Again, we note that the dissonance within the G-20 is loud and it appears that everyone is going to go their own ways. Unity at the G-20 conclave will be in short supply.
The Central Bank of Brazil is meeting this week and is widely expected to raise rates for the second consecutive time by 75 basis points. Brazilian GDP was released today and showed a very robust growth rate of 9 percent-plus, making it the world’s most vibrant economy. We will watch to see if Brazil mentions the stress in Europe and be attentive to see if Europe causes the Bank of Brazil to be less aggressive. Later in the week we get the Bank of England and the ECB, so we will hear what the developed banks plan to do going forward. We know there will be no rate increases but we want to see how much attention is paid to the international stage. In addition, we want our readers to read Martin Wolf in tomorrow’s FT as it supports the view often expressed here about the deflationary fears the world faces, thus in our view making GOLD the depository of last resort.
Tags: ECB, EFSF, G-20, Gillian Tett, Gold, Martin Wolf
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