The Latest Incarnation Of The European CDO Cubed Bailout "Swiss Army Knife": A Multi-Trillion Insurance Policy

Tyler Durden's picture

A few weeks ago Steve Liesman ramped stocks higher for the day after he released a subsequently disproven rumor that the EFSF would become a CDO square, recycling private investments into sovereign debt. Well that rumor is now dead and buried, so it is time for the next one involving that uber multi-functional Swiss Army Knife which is the EFSF, and apparently has an infinite+1 number of applications, none of which involve actual cash funding. The source of this latest brilliant idea is Pimco parent, Allianz, which has trillions in fixed income exposure all over the world, so it is no wonder it is pushing hard for the world's taxpayers to bail it out. Only instead of a recycling cash, this time the EFSF will become Fed-Lite, "insuring" trillions in debt.

From Dow Jones:

  • Allianz plan can insure EUR 3tln of bonds without increasing EFSF
  • EFSF bond issuance plan gaining traction in Europe according to Allianz
  • EFSF plan would insure portion of sovereign bonds according to Allianz
  • Goal is to have EFSF insurance plan approved by G-20 meeting according to Allianz

More from Dow Jones:

With time running out to finalize the euro zone's bailout fund, a plan by giant German insurer Allianz to turn the fund into a bond insurance program is gaining traction, the company's top executives said Tuesday.

 

The proposal to turn the European Financial Stability Facility into a institution that protects investors against a portion of losses has garnered support from other major European insurers and banks in the region, Paul Achleitner, the proposal's architect and a member of Allianz's board of management said during an interview with the Wall Street Journal and Dow Jones Newswires. After initial setbacks, the plan is now also being taken seriously by euro zone governments, Achleitner said.

 

With EUR450 billion invested in European assets, Allianz is the continent's largest investment institution.

 

"Don't use the EFSF as a lender, use it as a bond insurer," said Achleitner, who added that his plan would expand the impact of the EFSF, which currently has a lending capacity of 440 billion euros, to cover more than EUR3 trillion in bonds. That estimate assumes that 20% of the debt issued is insured and that it draws upon the full EUR780 billion that euro-zone governments have agreed to guarantee as backstop to the EFSF.

 

Achleitner, who was flanked by chief executive Michael Diekmann, said Allianz SE has been working closely with Deutsche Bank on the proposal in what have so far been mostly closed-door discussions. The program has the support of other insurers like MunichRe and some big French banks, among others, he said. It has recently been promoted by Goldman Sachs International Chairman Peter Sutherland.

 

With those institutions' support, Allianz is in close consultation with members of the so-called "troika" -- the European Central Bank, the European Union, and the International Monetary Fund, Achleitner said.

Why now?

When it was first proposed six months ago, Allianz's plan was dismissed by the German government, the biggest and most influential contributor to the EFSF. At that time, people familiar with the German government's thinking said the proposal was too unwieldy and faced legal hurdles.

 

But Achleitner said questions about European Union treaties that ban sovereign governments from directly guaranteeing the debt of other members have since been resolved. Exemption clauses for emergencies would get around those restrictions, he said.

Good to know that legal hurdles are promptly removed when the survival of the banker class is at stake.

At this point it is stupid to even comment on these ridiculous daily releases. Issue bullshit rumor, rinse, repeat, and so on until the latest portion of bullshit sticks to the wall for at least 24hours. Then start process all over again.

At some point someone may actually ask what happens when the insured capital needs to be funded, and just how the €3 trillion in losses will be made whole, because as usual, it is not a liquidity, or even a confidence, it is and has always been a solvency, read lack of cash flow, issue.

As a reminder, this is the Liesman rumormill from September 26:

  • 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.