The European Investment Bank’s bonds rallied after the development lender for the 27-member bloc was said to be getting a similar exemption from Greek debt writedowns to the euro area’s central bank.
The European Central Bank negotiated a deal to avoid the 53.5 percent loss on principal that’s costing private investors as much as 106 billion euros ($142 billion). The EIB, which unlike its Frankfurt-based counterpart represents the entire European Union, also owns Greece’s debt and is sidestepping the so-called haircut in the same way, according to two regional officials familiar with the matter.
“This continues the trend of burden-shifting,” said Gabriel Sterne, an economist at London-based brokerage Exotix Ltd. “This is bad crisis resolution and it’s going to affect things for years to come.”
The extra yield that investors demand to hold the EIB’s 5 billion euros of 3.5 percent senior notes due April 2016 rather than benchmark German bunds declined 25 basis points to 115 as of 11:33 a.m. in London, according to Bloomberg Bond Trader prices. That’s the lowest since Nov. 3 and compares with a spread of as much as 196 basis points on Jan. 12.
Peter Munro, the head of investor relations and marketing at the EIB, declined to comment, as did a spokesman at the ECB.
The ECB bought Greek and other euro-region government debt in an attempt to hold down borrowing costs amid the sovereign crisis. Making private-sector investors effectively subordinate to the claims of official bodies risks making it more expensive for countries to borrow in the future.
The Luxembourg-based EIB’s holding of Greek debt totals more than 100 million euros and less than 1 billion euros, said one of the officials, who declined to be identified because the matter isn’t public.
“This bolsters the case for pricing in additional risk premia in peripheral bond markets,” said Richard Mcguire, a senior fixed-income strategist at Rabobank International in London. “While the EIB’s holdings of Greek debt are small, if true, this exception further underlines the unevenness of the playing field.”
The bank is the EU’s main development lender and is owned by all its member states, while the ECB serves the 17-nation euro area. The EIB invested 72 billion euros in 2010, about 88 percent of which was spent on projects within the EU, according to its website. Vice President Wilhelm Molterer said in December that the bank would cut lending this year amid the euro-region crisis.
The EIB funds itself in the bond markets and raised about $22.5 billion this year from benchmark issuance in dollars, euros and pounds, according to data compiled by Bloomberg. It’s adding to its existing issue of 2.5 percent bonds due March 2019 today, a banker with knowledge of the transaction said.
The bank has top credit grades from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.
“This is all politics,” said Sebastian Paris-Horvitz, the chief market strategist at HSBC Private Bank Suisse SA in Geneva. “Defaulting toward any official institution of the EU would not fly well at this stage.”