EFSF hails success of bond sale to aid Ireland

25th January 2011, Comments 0 comments

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

Asian bidders snapped up more than one third of the total in what EFSF head Klaus Regling said demonstrated market confidence in the 17-nation eurozone, after the turmoil of massive bailouts for Greece and Ireland last year.

"This must be seen as a big success," 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 debt issue by the facility, which was set up on June 7, was "record breaking," with bids for 44.5 billion euros, almost nine times as much as was on offer, an EFSF statement said.

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

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 only be established once the cash reserve and an additional loan buffer have been reinvested, 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 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 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, which would see their cost of borrowing rise under such a scenario, have already downplayed the idea floated by the head of the eurozone finance ministers, Jean-Claude Juncker.

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

Capital Economics economists said the bond auction had "already raised hopes over recent days regarding the prospects for an increase in both the size and scope of the EFSF" to tackle liquidity problems in countries on the eurozone's periphery.

"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," the economists added in a research note.

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 statement said it would raise a total of 26.5 billion euros in capital markets this year and next as part of the Irish support programme, while the EFSM would borrow another 22.5 billion euros.

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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