EFSF takes key step towards eurozone bonds

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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 a heavily-oversubscribed sale on Tuesday.

The European Financial Stability Facility (EFSF), the main bailout mechanism for the 17-nation monetary union at the heart of Europe, raised five billion euros ($6.8 billion) to help Ireland as part of a joint EU-IMF Irish bailout.

Bids totalled nearly nine times the amount on offer.

The Luxembourg-based vehicle said the Frankfurt placing "implies borrowing costs for the EFSF of 2.89 percent," and noted that the Japanese government bought more than 20 percent of the five-year bonds.

"The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area," EFSF chief executive Klaus Regling said of the outcome.

Ireland will receive 3.3 billion euros of loans on February 1, the EFSF said.

While Dublin has had to pay increasingly high rates of interest to raise fresh funds on the money markets, the EFSF sale showed that investors were very interested in buying bonds backed by top-rated eurozone members, especially Germany, Europe's powerhouse economy and enforcer of eurozone rules.

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 main 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 much cheaper rates than Dublin could have got directly.

The International Monetary Fund provides another 250 billion euros to take the safety net up to 750 billion euros in all.

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 also come under pressure on the 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."

However, the success for the EFSF, with "very strong demand from Asia," according to the issuer, might not be enough on its own for now, with analysts saying a market in such bonds would be needed to make such a system really work.

"It would need to move onto a level where bonds would trade on a deep, liquid market," said Jean Pisani-Ferry, an 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 since they would be exposed to the debt of their weaker eurozone partners.

"If you do that, you put once again the cart before the horse," French Finance Minister Christine Lagarde warned on Monday, insisting that such a step would have to be matched by closer and tougher cooperation.

Cross-border budgetary and economic planning must be "integrated and consolidated," she said.

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 the unpleasant measures needed to put their finances in order.

© 2011 AFP

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