Monday, September 26, 2011

A New Wrinkle

The latest scheme out of the European political class is the idea of creating an SPV (Special Purpose Vehicle) that will "leverage up" the $ 400 billion fund that had been previously put in place to "stabilize" the sovereign debt crisis. How will this work?

The idea is that you create this SPV (think Fund) and put $ 400 billion into it in the form of equity capital. The SPV then borrows $ 1.2 Trillion from willing bond buyers. That gives you $ 1.6 Trillion to buy up Greek, Spanish, and Italian debt and stave off disaster. So, the theory goes.

So who provides the $ 1.2 trillion in debt capital? That is, who are the willing bond buyers who think investing in a vehicle that buys trash will be a winner? If you thought Wall Street cooked up outrageous schemes, try this one on for size.

This idea will not work. It is not the magic elixir. No one in his right mind would provide the debt financing for this vehicle. The US, no doubt, will volunteer to put money into this. (We love throwing money away). But, the rest of the world will balk at this silly idea. The Chinese will not fall for this.

What this scheme shows is that the politicians still haven't figured out that defaults are inevitable. Only defaults have any real shot of turning the situation around in Europe. Politicians can only make things worse by these kinds of dreams and schemes.

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