Requests by euro-area nations for the European Stability Mechanism bailout fund to buy their sovereign debt wouldn’t lead to sustainably lower yields and may spark an investor “exodus,” Lloyds Banking Group Plc said.
Any benefit of such deals would be “temporary,” London-based strategists Charles Diebel and Achilleas Georgolopoulos wrote in an e-mailed report today. The likelihood of countries applying for aid would increase if a European Union summit on June 28-29 fails to reassure markets that leaders are tackling the debt crisis, they wrote.
Appeals for ESM help “will be seen by the market as an indication that the country has lost its ability to fund from the market and will quickly price in the possibility of a full three-year bailout program,” the strategists wrote.
Investor concern that bondholders will rank below the ESM in the queue for repayment may also lead to an “exodus” from the securities, according to the note.
French President Francois Hollande yesterday championed the idea of using the ESM to purchase indebted countries’ bonds as a means of countering rising yields. German Chancellor Angela Merkel said such a move, while legally possible, “is not up for debate.”
The bonds of Spain and Italy advanced for a third day today. The yield on Spanish 10-year debt dropped 18 basis points to 6.57 percent at 3:29 a.m. London time. The rate on similar-maturity Italian securities slid seven basis points to 5.70 percent.