The ongoing side-show of the Euro crisis is dominating anew this morning. The latest fix for over-leverage in European governments and banks is a familiar old American favourite: add more leverage! European Union officials are reportedly proposing to each deposit seed money for a special-purpose vehicle that would be able to issue bonds and buy up euro zone sovereign debt with reported leverage of eight-to-one (or so), depending on how much capital comes from the European Financial Stability Facility (EFSF). The EFSF is a vehicle financed by euro zone members and designed to provide financial assistance to euro zone states suffering economic difficulty. At 8 to 1 leverage, seed capital will be wiped out entirely on a 12.5% decline in asset values. Who’s in?
This latest round of insanity too shall fail as another desperate plan to avoid truth and the inescapable need to write off bad debts. So far the German Finance Minister seems to be against it. Stocks and commodities are joyous on the hopium nonetheless. Stay tuned for the next jolt of reality from economic indicators which will re-focus the world back from the side-show to the main presentation: the in coming global recession.