Europe's Latest Rescue Deux Ex Machina: A CDO... SQUARED

Tyler Durden's picture

Steve Liesman has just broken news of the latest European bail out mechanism which will likely push risk higher for at least a few hours. Why just a few hours? Because what according to Liesman the ECB is about to propose, is nothing short of not just a CDO, but a CDO SQUARED. We are still waiting for more information, but according to his description of what this last ditch bailout bazooka (before Eurobonds of course), is that the ECB will take the debt bought by sovereign governments and will issue EURs against EFSF/ESM bonds as collateral: this is in its simplest definition, a CDO Squared (because as we have described in the past, the EFSF is simply a CDO), which in turn means that the systemic leverage of the Eurozone is about to rise 8-fold. If you thought the capitalization of the ECB was bad before, you ain't seen nothing yet. Expect cubed and quadratic iterations by the end of the week when the half life of this latest bailout rumor dies out. Oh, and expect many more headlines out of Europe talking about bailouts and hyperinflation as noted earlier.

And here is the summary quotes from Bloomberg:

  • SPECIAL PURPOSE VEHICLE TO ISSUE BOND, BUY SOVEREIGN DEBT
  • PLAN IS TO USE EFSF SEED MONEY FOR EUROPE INVESTMENT BANK
  • EUROPE PLAN IS FOR SPV TO ISSUE BOND, BUY SOVEREIGN DEBT
  • DETAILED PLAN IS IN WORKS ON LEVERING ESFS MONEY
  • PLAN IS TO USE EFSF SEED MONEY FOR EUROPE INVESTMENT BANK

In other news, this is what a diagram of the ECB will soon look like.