The European Financial Stability Facility issued six-month debt for the first time, selling 1.5 billion euros ($1.9 billion) of securities a day after the euro region’s temporary bailout fund lost its top credit rating.
The EFSF sold the 182-day bills at an average yield of 0.2664 percent, it said in a statement. Investors bid for 3.1 times the amount of bills sold, little changed from the 3.2 bid- to-cover ratio at a Dec. 13 offering of three-month bills. The facility’s longer-dated bonds underperformed their euro-area peers after the Standard & Poor’s downgrade to AA+ from AAA.
“The fact that the bill auction has gone so smoothly is encouraging,” said John Davies, a fixed-income strategist at WestLB AG in London. “The much bigger hurdle will be when, say, the EFSF comes to market with a five-year bond.”
The EFSF, designed to finance rescue packages for Greece, Ireland and Portugal with bond sales, owed its AAA rating to guarantees from its sponsoring nations. Two of those sovereigns, France and Austria, were cut on Jan. 13 to AA+ from AAA by S&P, which also downgraded seven other euro countries.
“The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities,” S&P said yesterday. “Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place.”
The decision was a “mechanical consequence” of the previous rating cuts and “does not represent in any way a lack of trust in the European financial backstops,” European Commission spokesman Amadeu Altafaj told reporters in Brussels today.
“The EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs,” said Klaus Regling, chief executive officer of the EFSF, said in an e-mail late yesterday.
S&P said governments “may currently be exploring credit- enhancement options” and if the EFSF adopts improvements “sufficient to offset its now-reduced creditworthiness,” the rating company “would likely raise” the rating back to AAA.
Euro-area finance ministers will discuss at a Jan. 23 meeting how to respond to the downgrade, a person familiar with the matter said on condition of anonymity because the talks are private.
Taken in Stride
Investors have taken the S&P downgrades of euro-area nations in their stride in an echo of the rally in Treasuries (USGG10YR) that followed the company’s downgrade of the U.S. last year. French borrowing costs fell at a sale of one-year notes yesterday and borrowing costs also dropped for Spain today in its first debt offering after a two-step cut by S&P.
The facility plans to to hold “regular” auctions of three-, six- and 12-month bills, Christophe Frankel , deputy chief executive officer of the EFSF, said in an e-mailed statement. Today’s auction “confirms investors’ confidence in EFSF as a high quality issuer,” he said.
Still, the extra yield investors demand to hold the EFSF’s 2.75 percent bonds due July 2016 rather than benchmark German government debt increased nine basis points, or 0.09 percentage point, to 163 basis points. The spread has widened 15 basis points from Jan. 13, the day France and Austria lost their AAA ratings at S&P. Ten-year EFSF debt underperformed all other euro-area sovereigns, bond-spread data show.
Regling underscored the fact that the EFSF, which has a capacity of 440 billion euros, will be replaced by a permanent fund in July. The European Stability Mechanism will be less vulnerable to rating changes, he told reporters in Singapore.
Luxembourg Prime Minister Jean-Claude Juncker, who leads euro-area finance ministers, said the EFSF “will continue to be backed by unconditional and irrevocable guarantees by euro-area member states.”
While S&P left the door open to return the EFSF to AAA status, it also said that if enhancements are “not likely to be forthcoming,” it would change the outlook to negative to “mirror the negative outlooks of France and Austria.”
German Finance Minister Wolfgang Schaeuble indicated the government won’t increase its guarantee on the facility, saying the nation’s liability of 211 billion euros is sufficient to ensure the EFSF’s ability to lend.
“The guarantee sum that we have is sufficient by far for what the EFSF has to do in coming months,” he said yesterday in an interview on Deutschlandfunk radio. Chancellor Angela Merkel said on Jan. 14 that she was “always of the opinion that the EFSF doesn’t necessarily need a AAA rating.”
The European Commission said yesterday that S&P’s downgrades ignored Europe’s progress in fiscal consolidation. Commission forecasts show the euro area’s aggregate deficit will fall to 3.4 percent of gross domestic product in 2012 from 4.1 percent in 2011, spokesman Olivier Bailly said in Brussels.
Kraemer said in an interview on Bloomberg Television yesterday that while there has been progress on fiscal discipline, “little has been done to address the core underlying problems” of competitiveness and imbalances.
Merkel said the rating company’s criticism of “insufficient” policy steps reinforced her view that leaders must redouble efforts to resolve the crisis.
Germany, France, the Netherlands, Finland, Austria and Luxembourg were the top-rated nations backing the fund, and Germany is now the only one of the 17 euro nations with a stable AAA rating.
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