Pretty much everyone who is not part of the problem has seen the EFSF as unlikely to work very well, and has regarded the idea of a levered EFSF with the sort of amusement and disdain reserved for bad taxidermy.
We’d linked to an article in Friday’s Financial Times about the EFSF that had more than a twinge of official bluster and desperation about it. It first had the hapless CEO of the fund, Klaus Regling, complaining that he could not lever it enough because markets were too volatile. How ’bout the real reason: there aren’t enough suckers. Anyone with an operating brain cell knows that without ECB backing, a scheme to lend to borrowers in trouble backed by the very same troubled borrowers is not such a hot idea.
Now we learn things are probably worse than they seem (and remember, they already weren’t looking so hot). From the Telegraph:
The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland.
However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds.
Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.
The revelation will be seen as a major failure and a worrying sign of future buyers strike after EFSF officials and their bankers had spent recent weeks travelling the world attempting to persuade key investors, including China’s national wealth fund and Japanese government funds, to buy its bonds….
Other European Union funds are also understood to have supported the EFSF’s bond sale. The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted.
There have been rumors and news reports that German politicians want the ECB to go in and monetize Italian debt, but feel forced to deny that in public. One of my well connected European tea leaf readers said that while there were big campaigns up in the Euro press, there is interest, but no consensus. A move like this is still very controversial in Germany, He also noted:
Not much doubt that if Monti is appointed in Italy the ECB will buy for a while to make him look good. But that doesn’t mean they’ll do it all forever.
And they do need to “do it forever” or at least be perceived to be willing to do so, for an ECB backstop to work.