Hitting the tape are leaked detailes obtained by Bloomberg detailing what the ESM will focus on as it is unleashed on the world. From Bloomberg: Europe’s permanent rescue fund will invest the core of its assets in AA or higher-rated debt issued by governments, central banks, euro-area agencies and international institutions, with the power to diversify into bank debt as it grows, its draft investment guidelines say, Bloomberg’s Brian Parkin, Rebecca Christie and James G. Neuger report. The ESM will keep at least 15% of its maximum lending volume, or EU75b out of an ultimate EU500b, in “assets of the highest creditworthiness” as per guidelines obtained by Bloomberg News. Does that mean all countries rated AA or below are ineligible? Because that pretty much invalidates Spain and Italy? Or is the draft going to be releaked with the AA revised to A, then to B then to CCC until finally the EURUSD sustains an upward move for at least 10 pips? But the funniest headline of all:
- ESM PLANS `PLAIN VANILLA' BORROWING STRATEGY TO LURE INVESTORS
Lure is truly such a great word here. After all nobody will ever get their money back.
From BBG [6]:
Europe’s permanent rescue fund will invest the core of its assets in AA or higher-rated debt issued by governments, central banks, euro-area agencies and international institutions, with the power to diversify into bank debt as it grows, its draft investment guidelines say.
The European Stability Mechanism, set to go into operation next month, will keep at least 15 percent of its maximum lending volume -- or 75 billion euros ($97 billion) out of an ultimate 500 billion euros -- in “assets of the highest creditworthiness,” according to the guidelines obtained by Bloomberg News.
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Euro-area governments will start paying into the ESM next month, raising its capital to 80 billion euros by mid-2014. The first 75 billion euros of investments by the fully capitalized fund will be restricted to a “general eligible assets list,” with amounts beyond that available to purchase securities from an “enlarged” list that includes bank bonds.
In addition to the 80 billion-euro cash component, euro- zone governments have agreed to provide the ESM with 620 billion euros in “callable” capital. Ultimately, that would leave the ESM with 700 billion euros to draw on, a sum that includes a buffer that wouldn’t be lent out to distressed countries.
Investments will focus on securities issued in euros. Any foreign-currency exposure will be hedged. The fund will use derivatives “for risk-management purposes only,” the document said.
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Investments will be divided into a short-term tranche geared to capital preservation over one year and a medium- to long-term tranche geared to capital preservation over three years. The longer-dated tranche could risk a maximum 2 percent loss over one year, the document said.
The fund will buy and sell securities “in a prudent manner” to maintain its creditworthiness and “limit any effects on market prices, even in situations of market stress.”
Other draft documents detail the ESM’s borrowing strategy and dividend policies.