It actually resembles the U.S. bank bailout, but it may not work out as well
After a brutal week, the U.S. markets had a pretty decent Monday, with the Dow and S&P 500 indices up more than 2%. This activity came despite a couple of weak U.S. economic reports, including a decline in new home sales. While we hate to rely on media reports for what's pushed the market up or down, many reasonably state that news of a new euro zone deal might have been responsible. Will the apparent new proposal actually help?
I say "apparent" new proposal, because reports indicate that officials in Europe are still discussing the approach. So what we've got so far is not final. But it's still worth discussing, since it does represent a new way to potentially solve the region's problems. So this explanation is based on reports out there, not a finalized plan released by European officials.
The European Investment Bank, owned by the European Union, will create a special purpose vehicle ("SPV"). It will put some cash into that SPV from its European Financial Stability Facility ("EFSF"). The SPV would also get funding by selling bonds to investors. With those cash proceeds, it will buy the sovereign debt of troubled nations (think: Greece). Those bonds the SPV issues can also be used by banks as collateral to borrow from the European Central Bank ("ECB"). Those banks may be having issues due to their euro zone sovereign debt holdings.