This is their "Five Corners" piece, which I always find interesting, even when I think part of it here or there is wrong. It is good to be challenged. And as I was teeing this up for the website, this note came in, which I will excerpt in addition: * The first question this idea raises is who will provide the equity capital? Indeed, in its initial conception, the EFSF was supposed to be a private Luxembourg company which raised money by selling bonds (guaranteed by the European governments) to the likes of the GIC, Adia, CIC, BoJ etc... And these institutions did subscribe to EFSF bonds when Ireland tapped the vehicle in January, and again over the summer. Fast forward to today, with France's AAA rating under a shadow, and given the inability of European governments to agree to much, will these same institutions be as willing to buy into the equity tranche of a 4-1 levered junk-bond CDO for returns marginally above those delivered by Europe's better sovereign signatures? * The second question, needless to say, is who will provide the leverage? Assuming that a consortium of Dexia, Societe Generale, Intesa, Santander, and Deutsche Bank together will not, right now, be able to provide the EFSF with €1.6trn in handy cash, then the fact is that only the ECB has that kind of fire-power. These realities bring us back to the reasons why Germany is currently stalling so forcefully; Chancellor Merkel is well aware that a "levered EFSF" option really means that German taxpayers end up providing the equity capital while the ECB ends up providing the debt. This is exactly what Germany wanted to avoid: a situation where its taxpayers are on the hook and the bad debt is monetized away by the central bank. In other words, the worst of both worlds! Incidentally, when Charles tried his hand at retirement 12 years ago, "the worst of both worlds" is how his wife Chantal described having a retired husband--more husband and less money--so that only lasted for a year. Now granted, Chantal is undeniably stronger-willed and more forceful than Frau Merkel, but it is increasingly hard to see how the Chancellor will not get her way. Indeed, as Germany continues to stall, the pressure on France is now building (France having to ride to Dexia's rescue-see Daily-The Consequences of the Dexia Bailout, Moody's threatening a downgrade, etc...). And as France enters into its presidential electoral cycle, the options for President Sarkozy are shrinking rapidly. Thus, rather than resolution, we will likely see further slow-cooking of the French until they scream for mercy (and recap their banks?). It will only be once the crisis is in full force that the ECB will commit to the kind of debt monetization needed to save the technocrats' Euro dream. Until then, it is better to avoid owning assets in Europe and maintain a short-Euro position, if only as a hedge in portfolios. ??