Flailing to Deliver the European Dream
If you didn't like the original, maybe you'll like the sequel.
The European Financial Stability Fund, one of the bloc's bailout vehicles, said Wednesday it's looking to issue bonds next week. Its appearance in the markets last week was a struggle: it managed only 1.5 billion euros ($1.6 billion) of 26-year debt, well short of its initial 3-4 billion euro plan.
Will things go better this time around? The EFSF certainly needs it to -- it and its sister vehicle, the European Stability Mechanism, have 57 billion euros of long-term funding to raise this year, and so far they've only done 8 billion euros. So the pressure's on for this to go well. It's not obvious that it will.
The market's already pretty crowded, as is normally the case around this time of year. Belgium and Finland may be looking to bump up some existing issues after recently completing large deals, Austria could well come next week with a 10-year and even an ultra-long 50- or 100-year deal. France may appear with a 30-year. Italy, which has its own dramas, has yet to join the party, but when it does the size should be substantial.
These are all syndicated issues marketed by investment banks, which governments use to top up their funding needs and get their annual issuance plans out of the way earlier, instead of just waiting around for their scheduled auctions. The two bailout funds don't have an auction schedule, and so are more exposed to the ebbs and flows of supply and demand when they market their deals. As top-rated issuers this normally doesn't really matter.
But the environment's changed. The political landscape has got rather worse, as seen in the flight from French debt. Everyone's feeling the pinch -- the disquiet's already widened EFSF spreads to Germany.
And some of the funds' friends look like they're keeping their distance. When they first launched during the throes of the European debt crisis, Asian buyers were prominent, with the government of Japan buying over 20 percent of the EFSF's first issue in 2011. How times change.
The ESM's January issue of 29-year debt and last week's EFSF deal had only about 1 percent Asian involvement. They're not the only ones -- Asian interest in the German-owned development bank KfW's 10-year issue on Tuesday was just 11 percent, about a quarter of what it was four years ago. It's hard to see why Asians would queue up for these funds when there are much higher yields going from perfectly good countries like France.
Next week, the EFSF could come with a 10-15 year issue, which is an easier sell than a longer deal. If it goes well, then we can all breathe a limited sigh of relief -- limited, because they really need to issue much longer paper. If it's a second struggle, then the bloc has serious problems.
These bailout funds have a huge amount to raise over a number of years, since this European crisis isn't going to resolve itself anytime soon. If they start to have trouble raising funds at the price they want, then the knock-on impact will be to lift the cost of actually executing all the bailouts they're supposed to fund. It's hard enough to rescue Greece when yields are at a record low, but keep adding a few extra basis points here and there to the bill, and over time this serious problem could become an insurmountable obstacle.
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