Euro Rescue Fund Authorized to Sell Debt After Italy Parliament Backs Plan
The European Union’s rescue fund for the single-currency region is now authorized to sell debt after Italy’s parliament approved the plan, putting into force a 440 billion-euro ($575 billion) backstop for the 16-nation economy.
The vote by lawmakers in Rome today means at least 90 percent of shareholders in the European Financial Stability Facility have completed legislative approval. That threshold allows the euro-area governments to issue the national guarantees for any debt sold by the EFSF, European foreign ministers said on June 8.
The Luxembourg-based EFSF, which would sell bonds backed by the guarantees and use the funds to loan to nations that are struggling to borrow, is the main part of a 750 billion-euro package designed to combat a sovereign-debt crisis triggered by Greece’s near default. The package has helped calm markets, with the yield premium investors demand to buy Spanish and Portuguese bonds over German debt falling 64 basis points and 36 basis points, respectively, since the fund was finalized on June 8.
The EFSF could roil markets if it’s forced to lead a bailout and sell debt near its borrowing limit, said Frank Will, head of frequent borrower strategy at Royal Bank of Scotland Group Plc in London. While the EFSF may be able to raise as much as 50 billion euros, “I can’t see that there will be enough investor demand for large volumes, such as 200 billion to 300 billion euros, let alone 440 billion if the euro area is in deep trouble,” he said.
‘Tricky Situations’
EFSF bonds could “crowd out borrowing by some euro-zone member countries in ways which are very difficult to predict at this stage,” said Marco Annunziata, chief economist for UniCredit SpA in London. There may also be “tricky situations when some of the countries issuing guarantees could themselves need to tap the fund,” he said.
EU Economic and Monetary Affairs Commissioner Olli Rehn said on June 2 that he hoped the “sheer size” of the fund, a special purpose vehicle being created for three years, “will help to stabilize markets” and make aid unnecessary. While the facility will provide aid only to national governments, the money can also be used to recapitalize banks, EFSF Chief Executive Officer Klaus Regling said in an interview published by Paris-based newspaper Les Echo on July 15.
Top Rating?
Regling has said he expects the EFSF, whose bonds would be eligible for European Central Bank refinancing operations, to get a top AAA credit rating. The full aid package includes another 60 billion euros from the European Commission, and the International Monetary Fund is expected to contribute 250 billion euros.
To ensure the highest rating, European finance ministers on June 8 approved a 120 percent guarantee of each country’s pro rata share for each bond issue. Each nation’s holding in the EFSF corresponds to its share in the ECB’s capital.
“It’s not at all clear to me how easily the EFSF can secure a AAA rating, when the ratings of a number of participating countries are lower, and in some cases falling,” Annunziata said today by e-mail.
European finance ministers also authorized the creation, when any loans are made, of a “cash reserve to provide an additional cushion or cash buffer for the operation of the EFSF,” according to a June 8 statement, which held out the prospect of further measures to improve creditworthiness.
European governments approved the unprecedented financial backstop on May 9-10 in a bid to end speculation that the euro area might break apart because of the debt crisis that started in Greece. A 110 billion-euro loan package for Greece unveiled on May 2 after the country was cut off from markets had failed to stem a surge in Portuguese and Spanish borrowing costs.
To contact the reporter on this story: Jeffrey Donovan at jdonovan26@bloomberg.net
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