The latest big idea to staunch the eurozone crisis is to use a leveraged rescue fund – where leverage is the magic ingredient. The problem with the European Financial Stabilization Fund is that it currently counts on just €440bn – perhaps enough to protect European banks’ balance sheets if there was, say, a 50 per cent write-off of Greek debt, and small haircuts of other eurozone bonds.

But what if there were bigger losses to absorb? Current talk is of leveraging up the EFSF to €3,000bn or more. After all, there is some €3,300bn of outstanding Greek, Irish, Portuguese, Spanish and Irish sovereign debt alone. What might these huge numbers mean for emerging markets? Continue reading »