Europe’s financial backstop set up to provide emergency loans to indebted nations plans to sell as much as 8 billion euros ($10.5 billion) in debt in January to fund aid to Ireland, Chief Executive Officer Klaus Regling said.
The European Financial Stability Facility may issue between 5 billion euros and 8 billion euros of bonds, Regling said at an event in Singapore today. Most of the bonds will probably be sold in Europe, while Asian and Middle East investors are also interested, he said, adding that he doesn’t see much demand in the U.S.
“I have talked to around 150 of the largest investors” about the bonds, Regling said. “Most will be taken up in Europe, not so much in the U.S., because the U.S. is running a current-account deficit so they need their own financing.”
European authorities approved an aid package for Ireland on Nov. 28 when it became the second euro-area nation after Greece to seek financial help. The assistance followed a surge in bond spreads among Europe’s so-called peripheral nations that raised concerns the debt crisis may spread across the currency region. The EFSF’s contribution to Ireland amounts to 17.7 billion euros, excluding bilateral loans from the U.K., Sweden and Denmark, according to a Nov. 28 statement issued in Brussels.
For Asian and Middle Eastern buyers, the EFSF will be a “new way to diversify for investors who are looking for high- quality triple-A assets,” Regling said. “That’s why they are quite interested in this.”
The yield on EFSF bonds will be a “little bit” above that of German bunds, Europe’s benchmark, Regling said. It will be an “average” of Europe’s AAA-rated nations, he said, mentioning Germany, France, Austria and the Netherlands.
While there is “continued uncertainty and tension,” it is “wrong” to say Europe is “disintegrating, the euro about to disappear,” he said.
The premium investors charge to hold Irish 10-year debt over bunds was at 659 basis points today after widening to a euro-era record 680 basis points yesterday. The yield spread for Portugal narrowed to 408 basis points from 430 basis points yesterday. It reached a record 484 basis points on Nov. 11.
“Europe has taken action over recent months to tackle sovereign-debt issues in the euro zone and it has shown that it is serious about the protection of the euro,” Regling said. Rising bond spreads in some euro nations may have reflected a “flight to safety based on overall market uncertainty,” and people should be “very cautious” about interpreting these as an increasing risk of default, he said.
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