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EFSF bond auction

January 17, 2012

Investors seem unconcerned about Standard & Poor's decision to cut the credit rating of the eurozone bailout fund, EFSF. Only a day after the downgrade, the fund enjoyed strong demand at an auction of six-month debt.

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graphic depicting euro sign
Confidence is rising at the EFSF that the crisis can be containedImage: picture alliance/dpa

The German Central Bank, the Bundesbank, organized the auction, and said it had received 4.6 billion euros ($5.9 billion) worth of bids for 1.5 billion euros of six-month bonds issued by the European Financial Stability Facility, EFSF.

The bid-cover ratio, closely watched by the markets to fathom investor confidence in the EFSF, was 3.1, meaning the auction was more than three times oversubscribed.

The average yield of the bonds was 0.2664 percent, which is considerably lower than the bond yields of EFSF short-term debt currently traded in the market. This means the new bonds will also push down the borrowing costs of debt-wracked eurozone countries.

Referring to the bailout fund's credit downgrade on Monday by ratings agency Standard & Poor's, the fund's deputy head Christophe Frankel said, "The success of today's auction confirms investors' confidence in the EFSF as a high quality issuer."

'Eurozone won't break up'

On Monday, ratings agency Standard & Poor's downgraded the EFSF by one notch to AA+, but said it would restore its top AAA ranking if the fund obtains additional guarantees.

The New York-based agency said in a statement that the decision was the result of downgrades to France's and Austria's ratings from AAA, since they serve as top-level guarantors of the fund.

Klaus Regling
EFSF chief Klaus Regling is confident the bailout fund has enough firing powerImage: AP

EFSF Chief Executive, Klaus Regling, however, said the move would have only "little impact because two other credit risk evaluators, Moody's and Fitch, have maintained their triple-A ranking for the bailout fund".

"There's no need to get overly excited yet," Regling told reporters in Singapore on Tuesday.

He also said he was convinced that the eurozone "will not break up," adding that "investor's fears over such a development are unfounded."

But the head of the European Central Bank, Mario Draghi, warned on Monday that if the bailout fund "wants the same price and lending capacity, it needs to have additional contributions from triple-A countries."

Draghi was referring to Germany, Luxembourg, Finland and the Netherlands - the four remaining AAA countries in the rescue fund.

Meanwhile, the European Union's economy commissioner, Olli Rehn, also expressed the need for the EFSF to be "reinforced."

The EFSF and its planned successor, the 500-billion-euro European Stability Mechanism (ESM), "could do with having their effective lending capacity strengthened," Rehn's spokesman Amadeu Altafaj told reporters in Brussels on Tuesday.

"We need a dissuasive impact to reassure markets the EU can contend with all eventualities," he said

Dwindling resources

The EFSF, which started off with a borrowing power of 440 billion euros ($557 billion), has 250 billion euros left, following rescues of Portugal and Ireland. Greece is also awaiting a second bailout installment to the tune of 100 billion euros.

Angela Merkel
Chancellor Merkel is reluctant to ask Germans for more bailout moneyImage: picture-alliance/dpa

That leaves only scant funds to come to the aid of Italy and Spain, the eurozone's two other debt-laden countries that have faced elevated borrowing costs.

However, Steffen Seibert, spokesman for German Chancellor Angela Merkel, told reporters on Monday, "The government has no reason to believe that the volume of guarantees that the EFSF has now should not be sufficient to fulfill its current obligations.

Germany is the EU bailout fund's biggest guarantor, standing in for 211 billion euros of the fund's total obligations.

Author: Uwe Hessler (Reuters, dpa, AFP)
Editor: Michael Lawton