UPDATE 2-EFSF repo request bolsters peripheral rally

(Adds quotes, market response)

By John Geddie

LONDON, Aug 3 (IFR) - The European Financial Stability Facility's (EFSF) request for bank loan facilities, and specifically a repurchase facility, bolstered buying in peripheral Europe on Friday, according to market strategists.

Bank sources stated they received a request on Friday morning for a repo facility from the EFSF, following earlier requests for uncommitted unsecured and committed secured loans over the last weeks.

"The repo facility is a signal that the EFSF wants to be fully ready for any proposed secondary market intervention," said Sphia Salim, European rates strategist at Bank of America Merrill Lynch.

"But ultimately, it will be Spain and Italy who must apply for the programme before any action is to be taken," she said.

A repurchase, or repo, facility is a money-market instrument which allows government securities to be exchanged for short-term capital.

Banks received the request during an aggressive rally in Spanish and Italian short-end bonds, resulting from ECB president Mario Draghi's announcement on Thursday that the ECB may undertake open market operations.

Rates officials said that the repo request throws weight behind speculation that the ECB will buy short-dated peripheral paper, while the EFSF will purchase bonds further out the curve.

Banks reported that they received the request at 0900CET. At that time, 10-year Italian bond futures had hit an intraday low of 96.40.

Christophe Frankel, CFO and deputy CEO at the EFSF, confirmed the institution had been in discussions with banks about various credit facilities but not specifically a repo facility.

"There are a few different types of lines we have discussed with banks in recent months," Frankel said.

"Answering to our demands, some banks are proposing repo facilities but that is not what we envisage today," he added.

Frankel said the credit line would create a short-term liquidity buffer allowing the EFSF to meet disbursements if conditions in the capital markets were not optimal.

An official at one bank which received the request said the EFSF did not give indication of size or terms. Given banks' funding costs, loan facilities bear a much higher cost than funding in the capital markets.

The banker stated that historically institutions tend to put backstop credit facilities in place to demonstrate to ratings agencies alternative sources of finance.

On July 25 Moody's changed the outlook on the EFSF's Aaa rating to negative from stable.

Before November 2011, the EFSF used a simple back-to-back funding strategy and could not pre-fund disbursements or apply for loan facilities.

Credit lines are relatively uncommon in the sovereign, supranational and agency sector but France's social security organisation -- Caisse d'Amortissement de la Dette Sociale (CADES) -- is one such issuer that has a revolving facility in place.

In January 2012, the French agency signed a one-year, EUR9bn revolver with 11 banks, replacing an older EUR12bn credit facility in February 2011. (Reporting By John Geddie, editing by Alex Chambers)