A Fannie Mae for Europe's Bonds?

Wall Street Journal
September 27, 2011

Of all the ideas to emerge from this weekend's meetings of the World Bank and International Monetary Fund, the most audacious is to turn Europe's existing €440 billion ($594 billion) bailout fund into a €2 trillion leveraged fund for buying European sovereign debt. Call it Europe's Fannie Mae solution.

Under one version of the proposal, the European Financial Stability Fund (EFSF) would be converted into a licensed bank, which would then post its existing capital and sovereign bonds as collateral with the European Central Bank, and receive still more cash in return. That cash would be used to buy more debt, which would in turn be put up as collateral for more central bank loans, and so on.

The ECB could accomplish the same thing by buying bonds directly with newly minted euros, and some analysts have suggested that this is exactly what it should be doing. But that would turn the ECB into a vehicle for funding member states' budget deficits, which it is specifically barred from doing.

Instead, the alternative being suggested is to turn the EFSF into a kind of leveraged buy-up fund for government bonds. This is supposed to achieve two things: First, it could take euro-zone members out of the clutches of those fickle and rapacious private investors. And, second, it would allow the ECB to maintain a sheen of respectability, as it would merely be lending to this bank against collateral, just as it does with other banks.

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