EFSF a stealth step towards eurozone bonds
Heavyweights France and Germany may oppose launching joint eurozone bonds as a solution to the debt crisis, but the eurozone took a radical step in that direction with little fanfare on Tuesday.
The European Financial Stability Facility (EFSF), the main bailout mechanism for the 17-nation monetary union at the heart of continental Europe, put up for sale its first bonds, which was 10 times over-subscribed early Tuesday.
Aiming to raise between three and five billion euros ($6.8 billion) to lend Ireland as part of the joint EU-IMF Irish bailout, the bond issue had received some 43 billion euros of offers by mid-morning.
While investors have been sniffing at Irish sovereign bonds, demanding higher and higher rates of return, the auction showed that investors valued the fact the top-rated eurozone members stand behind the repayment of the EFSF bonds.
As Dutch-based ING analyst Padhraic Garvey said: "Investors are falling over themselves to get their hands on the EFSF bond," not least after Ireland's Greens said they would back Dublin's finance bill, the key legal plank in the bailout conditions, before an end-February general election forced onto beleaguered Prime Minister Brian Cowen.
Created in May 2010 in the wake of the Greek debt crisis, as a signal that European Union political leaders would do everything in their power to ring-fence their decade-old shared currency, the EFSF had yet to be tapped.
Greece's 110-billion-euro bailout was organised on the basis of coordinated bilateral loans.
The EFSF, authorised to borrow up 440 billion euros backed by guarantees from eurozone members, is the EU's central weapon to help members whose finances get out of hand.
Another fund, the EFSM, is authorised to borrow 60 billion euros backed by guarantees from the EU budget, and has already raised five billion euros for Ireland at rates much cheaper than Dublin could have directly.
The IMF is also willing to chip in up to 250 billion euros to take the safety net up to 750 billion euros.
A number of voices within Europe -- most prominent among them head of the eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker -- have called for expanding on the EFSF idea to allow countries with sound finances but facing difficulties to raise funds to issue bonds backed by the entire eurozone.
Former Belgian prime minister Guy Verhofstadt, who heads Liberal lawmakers in the European Parliament and who has seen his country creep towards a group of eurozone states under pressure from markets, says "we have already started" down the road to eurozone bonds with these new fundraising tools.
Now, he says it is time to go further and take "the step towards a European system of bond issuance to cover a part of public debts."
That said, the greater the success for the EFSF issue for Ireland, the farther away institutionalised, mutualised eurozone bond issues could be.
"It would need to move onto a level where bonds would trade on a deep, liquid market," stressed Jean Pisani-Ferry, a respected EU analyst with the Bruegel institute in Brussels.
To make that happen, Berlin and Paris would have to be willing to mutualise perhaps half of their debt issuance -- with they fear would lead to an increase in their borrowing costs.
"If you do that, you put once again the cart before the horse," French Finance Minister Christine Lagarde warned on Monday.
First, cross-border budgetary and economic planning must be "integrated and consolidated," she underlined.
Germany has also expressed concern that having recourse to joint eurozone bonds, without having to agree to strict fiscal adjustments as part of formal bailout programmes, would result in countries postponing needed corrections.
© 2011 AFP