Traders are trying to track all the rumors about what the European Union’s financial chieftains are talking about. It seems to boil down to a lot of financial engineering.
Supposedly, the European Financial Stability Facility is currently being contemplated as the source of seed money for a special purpose venture that would then issue the long-anticipated pan-European bonds to investors.
Money from that offering would then be used to buy back the debt of the euro zone’s weakest members, preventing any defaults that might loom in the future.
Meanwhile, the European Central Bank would accept bonds from the EFSF venture as collateral for short-term borrowing.
Depending on how much capital comes from the EFSF in this scheme, the pan-European bonds could be leveraged up to eight times their underlying assets.
On the other hand, the EFSF’s money could also be used directly to bolster the capital of European banks in trouble, shielding them from any meltdown in their sovereign debt holdings.
Either way, the euro (EU, quote) is rising today, pushing the shorts (EUO, quote) onto the defensive:
At the end of the day, while progress is good, be careful of this “hope” rally. We still do not know whether the ratings agencies will accept whatever deal the Europeans put together — and even then, the people will need to vote.