Euro Summit Statement Explained

Okay, so here is the statement, but what does it mean? Felix Salmon offers an unnamed advisor’s flowchart. Let’s see if Money View thinking can do better.

Words are of limited help here (unless perhaps you are a Munchau!). What is important is to understand the balance sheet relationships, and that takes a video.

The upshot of this video is to appreciate how the EFSF is supposed to support the market for peripheral debt, in much the same way that the national banking systems of the affected countries were themselves doing, until their own credit came into question. That way of thinking about the problem points to the credit of Germany and France as the key to making the thing work which, as other commentators have pointed out, is a problem.

Behind the scenes however, and unmentioned in the Statement, is the ECB, prepared presumably to provide whatever short term liquidity is necessary to put this structure, or some suitably revised version of it, into place. It is not the credit of Germany or France as fiscal entities that matters, rather the credit of the ECB as a bank.

So here is the key question: fund or bank?

The entire Summit Statement reads like an attempt to create an intra-European version of the IMF, with fixed quotas (the initial 440 Euros). It is going to be able to issue its own version of SDRs through the special purpose vehicle, but the amount will be limited. All the language is fund language, not bank language.

If investors look through the structure and find Germany and France at the anchor point, that is one thing. All of the fancy apparatus creates lots of employment for analysts to figure out how to value the resulting complicated paper. And very likely it won’t work.

On the other hand, if investors look through the structure and find the ECB at the anchor point, or even a consortium of central banks working in concert with the ECB, that is another thing entirely. Watch this space for further developments

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