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Thinking Out Loud

Sigma Investment Counselors

December 1, 2011

Below is a recent internal email conversation that took place amongst a few of our investment professionals. This thread may prove interesting to those who are also pondering possible ‘fixes’ for the Eurozone’s current money woes. If you have any further thoughts or comments, please feel free to share!

From: Robert Bilkie, Jr.
Thinking out loud – would/could/should the US do a “Brady Bond” for Europe? Guarantee principal along with Germany and China? Take collateral?

Is anyone thinking about this?

From: Chris Frayne
I don’t think that US taxpayers would want anything to do with guarantees of that magnitude, even if they were backed by collateral. The US seems to be somewhat removed from the current European crisis. Wasn’t the Brady Bond plan put together because US banks had lent too much to Latin American countries? By using treasuries as collateral, the US government was offering US banks a way to hold this debt on their books at a stable value. With Europe, from what I can tell, US banks do not have outsized exposure and therefore do not need to be backstopped. If anyone were to put a Brady Bond plan in place, wouldn’t it be Germany without the help of the US?

From: Robert Bilkie, Jr.
I am not certain that US banks have such moderate exposure. The credit default swaps they have put into place may not prove worth anything.

From: Denise Farkas
I am not sure of total exposure by US banks but total direct exposure seems to be manageable from all accounts that I have read. Just making it up as I go along here, but my sense is that we would need to see a majority of the major European banks (not countries) on the brink of default. Especially since Brady Bonds would be yet another bail out of the banks which are too big to fail. (Not a popular theme.) A better strategy may be for the US to use the leverage through the International Monetary Fund so other countries (China) would also have to participate. Then an instrument similar to Brady Bonds could be used as leverage to get not only Euro-currency countries but also European Union members (primarily Germany and France) to step up to the plate. The only way I see Brady Bonds becoming acceptable to US taxpayers is if there was a long term advantage/influence the US would gain in Europe vis-à-vis China. Even then I think it would be a tough sell. Taking into considering all the items Congress has been unable to work though, I would give low odds of Brady Bonds per se. Occupy Wall Street would really have a cause around which to rally which means the Obama administration would be unlikely to support such a plan.

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