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EFSF Used as Insurance Fund?

Here's a headline bound to stir debate: "EU said to see EFSF first-loss bond insurance is top option."

Everyone knows the EFSF, with roughly 440 billion euros (about $600 billion) in funds, does not have enough to do everything it needs to do: make loans to sovereign countries and, possibly, backstop European banks.

One solution being kicked around is to guarantee new bond issues by member states. In other words, instead of issuing bonds itself, the EFSF would provide a guarantee on sovereignbonds — essentially taking the first part of any losses.

How much of a guarantee? That's the debate. It could be anywhere from, say 25 percent to 100 percent of the losses.

The big advantage: it would leverage the EFSF and create a more serious backstop. So if there was a guarantee of, say, 50 percent, the capacity of the EFSF fund would go from 440 billion euros to 880 billion euros if all the money is committed to a guarantee.

The downside: due to the leverage, risk to the EFSF goes up. If the world goes to hell again, the EFSF is on the hook — and will have to go back to its 17-nation constituency with cup in hand.

The hard-liners will strenuously object. No matter: it is all-in time in Europe. Concepts thought unthinkable a couple months ago, like a 50 percent haircut on Greek debt, or large-scale bank recapitalization, are now mainstream thinking in Europe.

EU bureaucrats may still be too slow in their thinking for the trading community, but they have come a long way in a short period of time.

Elsewhere:

I know we're all obsessed with Europe, but earnings may be just as important.

We have had only a sampling so far. It has been very mixed:

Alcoa a miss and cautious,

JPMorgan poor investment banking results and very cautious,

Google strong.

But these are the stars in their sector. In the next two weeks, other big names will be reporting: IBM, Intel, Xilinx, American Express. "These will tell all," one trader wrote this morning.

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