EFSF

Ralph Atkins

Jens Weidmann, Bundesbank president, would have “no problem” with the European Central Bank selling its Greek bonds as part of a package to help the country’s bail-out. But he has thrown doubt on whether governments will pick-up the bill.

“I would have no problem removing the balance sheet risks that we were hesitant about accepting in the first place – so long as their removal does not lead to losses,” he told Handlesblatt, the German business newspaper, in an interview published on Wednesday.

His comments provide confirmation that the ECB would be prepared to forgo the profits it had expected to make on its Greek bond holdings – but, crucially, that no deal has yet been struck. Read more

Ralph Atkins

Not just financial markets look set to be disappointed by the European Union weekend summitry, which has just started in Brussels. A big loser could be the European Central Bank.

The ECB was forced to reactivate its government bond buying programme in August after the eurozone leaders’ last attempt at crisis management – at a summit in July – backfired and the crisis spread to Italy and Spain. Then, the expectation was that the European Financial Stability Facility would become operational and able to takeover the ECB’s role in intervening in bond markets. Without an effective deal soon to enhance the EFSF, such hopes will be dashed. Read more

Ralph Atkins

If only central bankers could rely on politicians! More than an element of frustration at the ways of governments was clear when Jean-Claude Trichet, European Central Bank president, gave evidence this morning to the European Parliament for the last time.

He urged European governments to “act together swiftly” to address a crisis that had taken on a “systemic dimension”. He also went further than before in hinting that the €440bn European Financial Stability Facility – Europe’s new bail-out fund – might not be up to the job, even if proposed enhancements to its powers are approved by Slovakia. Read more

Ralph Atkins

The European Central Bank favours the eurozone using as flexibly as possible its €440bn bail-out fund, the European Financial Stability Facility. But does that include giving the EFSF access to its liquidity?

The idea of making the EFSF an ECB “counterparty” – able to take part in its regular offers of unlimited liquidity – was proposed originally by Daniel Gros and Thomas Mayer in a Centre for European Policy Studies research paper. It gained ground last week as European leaders came under pressure in Washington from the rest of the world to come up with a more decisive response to the escalating eurozone debt crisis. With access to ECB liquidity, the EFSF’s firepower would be enormous. Read more

I said previously that any eurozone bail-out should ideally happen after 2013. Events have overtaken me. It would be best, now, if vulnerable euro member states could hang on for a couple more years. And all because of domestic German politics.

Angela Merkel’s coalition partners, the Free Democrats, resisted the idea of paying in so much capital to the eurozone rescue fund so quickly. As a result, the eurozone rescue fund will be capitalised later, and more slowly.

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If it is approved, the nascent agreement reached in the small hours of Saturday morning will address many of the symptoms of the eurozone’s disease. Note, though, that the fundamental issue of bond haircuts was not addressed. Euro leaders’ hard work leaves them on target for what was a very tight March 24/25 deadline. Measures include:

  • Increase the effective lending capacity of the EFSF from ~ €250bn to €440bn. The Fund already had €440bn at its disposal in theory, but needed to hold back a proportion in order to issue AAA-rated debt. Discussions are ongoing on how to achieve this.
  • Give the EFSF the right, “as an exception”, to intervene in primary debt markets – though with such strict conditionality that some analysts say this will make little effective difference. The right, which will extend to EFSF successor, the ESM, is not a full substitute for the ECB’s bond-buying programme, since the ECB buys bonds in both the primary market (government auctions) and secondary market (resale of already-issued bonds).
  • Lower the rates charged by the EFSF on bail-out loans to take into account debt sustainability of recipient countries. Rates should remain above facility’s funding costs and in line with IMF pricing principles.
  • Specifically, for Greece: reduce the interest rate on rescue loans from 5.25 to 4.25 per cent and increase the average maturity of Greek bail-out loans from 4 to 7.5 years.
  • €500bn funding confirmed for the ESM, EFSF successor.
  • Further explore the idea of a financial transaction tax.

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Klaus Regling, EFSF chief, is apparently wondering whether he could have demanded better terms for Tuesday’s 2016 bond, given spectacular demand. Indeed, he probably could have secured a higher price (lower yield) – a valuable lesson for the remaining €21bn-odd debt to be issued this year. But would Ireland benefit if he did, or would the EFSF just stand to make a bigger margin?

The 2016 €5bn bond issued by the eurozone yesterday is intended to finance a loan for Ireland. Lex points out that of the €5bn raised at 2.89 per cent, only €3.3bn will be lent to Ireland – at about 6.05 per cent. (The final cost to Ireland and the exact loan amount won’t be known tillthe EFSF has reinvested the cash reserve and buffer.) Read more

European officials are considering measures to overhaul the eurozone’s €440bn rescue fund, including using it to buy bonds of distressed governments, say people involved in the deliberations. The changes would make it easier to aid debt-burdened economies without resorting to fully fledged bail-outs.

Buying bonds of distressed countries to lower their borrowing costs is currently only being employed by the European Central Bank, a policy that has proved controversial. Read more

It’s acronym war. Sovereign wealth funds in Norway and Russia are backing away from Irish and Spanish debt, sending bond prices down and yields up – in some cases to record levels. Rumour has it the ECB is trying to help by buying peripheral eurozone debt, which is slowing but not halting rising yields.

So the big question is: will the rescue fund be needed? The ECB’s largest weekly bond purchase was about $23bn, after all, and these SWFs between them command $663bn. What proportion of that is invested in Spain and Ireland, we can’t be sure, but the (very short) list of Russia’s remaining investable countries suggests the Russian holdings in each country were significant.

Take Ireland. Irish 10-year bond yields reached record highs of 7.53 per cent today. Not a lot has changed in the country itself. But (perhaps ill-timed) discussions on the shape of a permanent rescue fund in the EU have changed a great deal. First, the possibility of a debt restructure is alive and well; a permanent fund is needed, after all. Second, there is talk that bondholders will have to bear some of the loss in the case of a restructure. Default no longer means delay: it might mean a significant loss.

The point at which the Eurozone Financial Stability Fund would offer its services, and the rate at which it would lend are unknown. A mooted rate is 8 per cent, and Ireland seems perilously close. Two things here. Read more

The ECB didn’t buy any bonds last week, following an abstemious week the week before. Under the Securities Market Programme, the ECB has been supporting peripheral eurozone members by buying government securities since sovereign debt troubles in Greece in May.

Recent Irish and Portuguese sovereign debt woes prompted a resurgence in this (highly unusual) ECB activity, but the overall trend is clearly downwards (no doubt to Axel Weber’s delight). Markets have been calmer since the IMF-EU bail-out of Greece and the creation of the EFSF. Pity Mr Weber wants to phase that out, too.