Bloomberg News

EFSF Bonds Fall After Pulled Deal Fuels Bailout-Role Concerns

November 04, 2011

Nov. 3 (Bloomberg) -- The European Financial Stability Facility’s bonds fell amid concerns its role in bailing out the euro region is in jeopardy after the fund pulled a 3 billion- euro ($4 billion) bond sale because of market volatility.

“The EFSF was meant to be the great hope during times of sovereign stress,” Jim Reid, the head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to clients today. “The last few days have proved that the vehicle has many drawbacks. Will the insurance scheme be as unloved in times of future stress?”

The extra yield investors demand to hold Luxembourg-based EFSF’s 5 billion euros ($6.9 billion) of 3.375 percent bonds due 2021 rather than benchmark government securities widened six basis points to 166 basis points, the most since the notes were issued in June, according to Bloomberg Bond Trader prices. A basis point is 0.01 percentage point.

The EFSF postponed its sale of 10-year debt yesterday after Greek Prime Minister George Papandreou requested a referendum on his country’s bailout plan, which whipsawed markets and prompted euro-region leaders to cut off financial aid until the matter’s settled. France and Germany have made the referendum a vote on whether Greece should remain in the 17-nation currency union.

The EFSF, whose securities have underperformed German bunds even as they share the same AAA rating, delayed the issue “due to market conditions,” spokesman Christof Roche said.

‘Become a Credit’

“The frightening thing is that the EFSF might just have become a credit, and that’s not good,” Gary Jenkins, the head of fixed income at Evolution Securities Ltd. in London, wrote in a note. “If it continues to perform like that, then the bailout fund might need a bailout.”

The EFSF planned to use the proceeds of the bond sale to help finance the rescue of Ireland, the second euro-area country to seek international cash after Greece and before Portugal. The fund said on Oct. 31 that it hired Barclays Capital, Credit Agricole CIB and JPMorgan Chase & Co. to manage the deal.

“The lifeboat is sinking,” wrote Bill Blain, the co-head of strategy at broker Newedge Group in London. “The EFSF is bows down, the planks have sprung and it all looks distinctly less than inviting.”

--With assistance from Ben Martin in London and Esteban Duarte in Madrid. Editors: Andrew Reierson, Michael Shanahan

To contact the reporters on this story: Paul Armstrong in London at Parmstrong10@bloomberg.net; John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net.


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