Europe is at her inflection point. Germany must approve super charging the EFSF. She must sanction turning on the monetary monster created May 9th 2010.
We have explained and investigated the rise of the euro bond through the EFSF before here:
http://www.capitalsynthesis.tech/eurozone-greece-statement/
The EFSF is a new debt issuing entity. Her ‘capital’ is simply debt issued by euro states. This ‘capital’ is about to be geared. We now have a ‘flick of the switch moment’. As we predicted, the EFSF ‘monster’ is to be turned on through being ‘leveraged’ or in a plainer English, simply, taking on more debt.
(Europe’s monetary strategy involves money supply expansion through debt issuance. The US’s monetary strategy involves money supply expansion through money printing. It is a wafer thin line that divides them in truth).
The Fed’s reluctance to expand her balance sheet last Wednesday has very purposefully, imo, passed the monetary ball to the Euro zone. The ECB has already expanded her balance sheet but more monetary juice is clearly needed. The EFSF represents a new debt issuing entity that can leverage her newly formed balance sheet and issue bonds against the entire euro area’s people and guarantees. This is a very key moment in European and world monetary history therefore.
Events are unfolding rapidly now due to the ever weakening economic data. The EFSF is, therefore, on the verge of being “monetarily super charged” via a massive leverage program. Permission of European states is needed. In Germany this means parliament and the lower house must approve the move. The German vote in parliament is scheduled for this week. The sequence of events required are in motion and seemingly unstoppable. This is a hugely significant moment in European and world history.
From Reuters at the G20 summit:
“No details were given of how the EFSF might be altered, although French Finance Minister Francois Baroin used the word “leverage” in comments to reporters”.
The US through Geithner is urging the Euro zone to leverage up. The Fed’s inaction increases the pressure.
http://www.newser.com/story/128678/timothy-geithner-to-europe-leverage-efsf-bailout-fund.html
http://www.spiegel.de/international/germany/0,1518,788082,00.html
http://www.forexlive.com/blog/2011/09/23/emu-fin-mins-to-discuss-leveraging-efsf-at-october-meeting/
http://www.breakingviews.com/2011/09/16/Euro%20zone.aspx?sg=nytimes
http://uk.reuters.com/article/2011/09/15/eurozone-idUSL5E7KF1CX20110915
Rich
p.s. We have commented before here metrics around world money supply growth. A new report from the BIS (Bank of international settlements) confirms what we already suspected. IE that USD debt is surging though not in the US, or in DM markets but in EMs. A rising USD could lead to a nasty de-leveraging process in Asia and S.America. Pegs or appreciation by EM states to the USD provides stability and stimulus as USD debt becomes more serviceable as the USD is debased. If/when the USD debasement reverses vs EM currencies its could set in quite a de-leveraging process and is bad for world money supply growth. Vs this the euro is increasingly being used as a funding currency by EMs. This trend could well develop especially in light of the EFSF as above and increasing euro liquidity injections. If the ECB lowered rates and the Euro debases vs Em Fx the pillars for a sustained move to the euro as a funding currency would be in place. To monitor this watch these two metrics. ECB interest rates and Euro/EM fx pairs. Here the report:
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