EFSF hails results of bond sale to help Ireland

25th January 2011, Comments 0 comments

The European Financial Stability Facility hailed Tuesday a landmark five-year bond auction worth five billion euros ($6.8 billion) to raise funds for Ireland and help calm eurozone financial markets.

"This must be seen as a big success," EFSF head Klaus Regling told a press briefing near Frankfurt after the figures were released.

"It may well be a turning point" in the eurozone debt crisis, he added.

Demand for the first bond issue by the facility, which was established in June to help heavily-indebted eurozone members, was "record breaking," with bids for 44.5 billion euros, almost nine times as much as was on offer, an EFSF statement said.

"I am delighted with the outcome of our inaugural issue," Regling said.

"The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area."

The so-called book building process used to establish buyers was completed in a blistering 15 minutes, the EFSF head said.

A yield or interest rate of 2.89 percent would be paid on the top-rated bonds and Ireland would borrow 3.3 billion euros of the amount raised at a higher rate once fees and other charges were taken into account.

"I think the cost for Ireland will be around 6.0 percent" but the precise figure could not be established immediately, Regling said.

Asian buyers accounted for almost 38 percent of the sale, with the government of Japan alone taking up more than 20 percent, he added.

Dutch-based ING analyst Padhraic Garvey said investors were "falling over themselves to get their hands on the EFSF bond," which can be used as collateral by banks that wish to borrow cash from the European Central Bank.

It has been suggested that the EFSF could eventually buy existing and future eurozone government bonds on secondary markets or lend governments the funds to buy back their own bonds at cheaper prices, thus reducing their debt burdens.

But Regling dismissed speculation that this week's bond sale was a dress rehearsal for the disputed issuance of so-called E-bonds that would be jointly guaranteed by eurozone countries, raising costs for the most credit-worthy to the benefit of their weaker euro partners.

Germany and France, two countries that would see their cost of borrowing rise under such a scenario, have already rejected the idea, which was floated by the head of the eurozone finance ministers, Jean-Claude Juncker of Luxembourg.

"This is not the first of that kind of eurobond," Regling said Tuesday.

He added that E-bonds were a question of definition since bonds guaranteed by the 27 European Union countries have already been issued by the European Commision.

Today's operation was the first guaranteed by the now 17 eurozone countries.

Capital Economics economists said in a research note that "the issue has already raised hopes over recent days regarding the prospects for an increase in both the size and scope of the EFSF to address the periphery's liquidity problems.

"But while such developments are necessary, we would stress again that they do not get to the heart of the region's more fundamental economic and fiscal problems."

Regling also stressed the need for economic reforms and budget consolidation by heavily-indebted governments to underpin the eurozone.

The EFSF is separate from Greece's 110-billion-euro bailout that was agreed on the basis of coordinated bilateral loans under the auspices of the EU and International Monetary Fund.

Yet another programme, the European Financial Stabilisation Mechanism (EFSM), is authorised to borrow 60 billion euros backed by guarantees from the EU budget, and has already raised five billion euros for Ireland.

The EFSF is to be replaced by a permanent crisis resolution programme, the European Stability Mechanism (ESM) in mid-2013 pending changes to European Union treaties.

© 2011 AFP

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