Updated 15:04 pm 10/26... Reuters is citing a draft of the summary statement from the EU summit in reporting that the EU leaders plan to leverage the EFSF bailout fund “several fold” and that Finance Ministers will determine the details of the exact amounts in November.
Wire reports, also citing a review of the draft statement, are saying that the leverage of the EFSF is expected to be on the order of 4X. Thus, from a base of €250-275 billion, the ultimate “firepower” of the bailout fund will be $euro;1.0 – 1.1 trillion.
According to the report, the EFSF will have the flexibility to deploy two models simultaneously: the “first-loss insurance” model and the public/private special purpose fund.
Wire reports say that the Special Purpose Vehicle within EFSF will be used to increase resources for the bank recapitalization and for buying bonds in the primary and secondary market. The bond purchases on the secondary market are a means to combat contagion and keep rates low.
Reuters says that the draft also states that additional enhancements to the EFSF are possible through cooperation with the IMF. Recall that earlier today there was a report that the Chinese were considering participating in the special purpose fund via the IMF.
We will note that none of the above is a surprise and the plans fall largely in line with what has been discussed over the past 24 hours.
The statement also addresses Spain, saying that the country needs to work on labor market reforms and other means to increase its competitiveness.
On the subject of Italy, via a letter to the EU, the government said it is ready to take further steps to cut the deficit if necessary. The letter also states that Italy's growth plan will be presented by 15-Nov.
However, there is still the not-so small matter of the Greek debt writedowns to be dealt with. We are hearing that although the banks/holders of Greek debt recognize that larger haircuts are needed, the talks on the exact amount of the haircut have reached an impasse.
Bloomberg reported earlier that German Chancellor Angela Merkel had doused expectations of a breakthrough on the topic. Merkel said in Brussels that “work’s not been done yet, but everyone’s coming here today with the goal to progress quite a bit.”
The draft statement says that adequate support will be provided to recapitalize Greek banks to address the implications of writedowns in the private sector.
As expected, the statement also mentions that banks will be expected to increase their Core Tier 1 capital levels to 9%. However, no figures have been provided as to the anticipated capital needed by the European banks.
Check back to this report as we will update with any incremental news.
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