January 25, 2011 / 1:42 PM / 9 years ago

UPDATE 2-EU says EFSF bond issue could mark crisis turning point

* Debut EFSF 5-year issue nine times oversubscribed

* Prices imply borrowing cost of 2.89 pct

* Japanese government buys over 20 pct of debut issue

* Funds to be used to finance bail out of Ireland

(Recasts throughout with auction result, reactions)

By Luke Baker and Jonathan Gould

BRUSSELS/FRANKFURT, Jan 25 (Reuters) - The debut bond issue for the fund being used to bail out Ireland was hugely oversubscribed on Tuesday, prompting the fund’s head to suggest it could be a turning point in the euro zone’s debt crisis.

The European Financial Stability Facility’s (EFSF) 5 billion euro offer was nine times oversubscribed, partly on Asian demand which included the Japanese government buying up over 20 percent.

Fund chief Klaus Regling said the auction matched Ireland’s request for a 3.3 billion euro loan and should put to rest any worries about the euro zone debt crisis.

“It may well be a turning point,” Regling told a news conference in Frankfurt.

“We have already seen in the last few weeks that the markets have changed their attitude towards the euro. They understand better today that, indeed, the euro area countries will do everything to maintain price stability in the area,” he said.

Michael Leister, a debt strategist at WestLB in Dusseldorf, said the high demand would “be interpreted as showing there is confidence in this mechanism and, as a consequence, in the whole euro system”.

The euro came off a two-month high after the auction having risen in early trade on the expectations. [ID:nLDE70O24J]

The 440 billion euro ($600 billion) EFSF was set up in May last year after the Greek crisis to help any heavily-indebted euro zone member state unable to raise funding in the market.

It is AAA-rated and was always expected to attract strong interest. The fund said the implied borrowing cost was 2.89 percent, which is only slightly higher than ultra-safe German government debt with an equivalent maturity.

The EFSF said it closed the order book with demand at 44.5 billion euros and 500 investors taking part, in a stamp of confidence for the 17-country euro zone.


“The idea that the euro might disappear, that the euro area might disintegrate, is absurd, and more and more people in the market are realising this now,” Regling told reporters.

The government of Japan alone bought over 20 percent of the issue as bids from Asia were particularly strong. Asked if China was among the bidders, Regling said only that no major global players were missing.

“It was always going to go well with the likes of the Japanese and Chinese reserve fund managers — and probably a whole heap of others — piling into it like there’s no tomorrow,” said Marc Ostwald, strategist at Monument Securities.

German Economy Minister Rainer Bruederle said the strong demand showed EFSF volume was sufficient and reflected confidence in Europe’s ability to act. [ID:nBAT005946]

The EFSF was set up after Greece was forced into a bailout and can borrow on the market using 440 billion euros of guarantees provided by euro zone governments.

Together with the 60 billion euro European Financial Stability Mechanism and 250 billion euros from the International Monetary Fund, the EU has in theory a total of 750 billion euros available to tackle any future bailouts after Ireland.

However, because of cash buffers and other guarantees built into the EFSF to ensure it retains a AAA rating, its effective lending capacity is estimated to be only 250 billion euros, which restricts how many bailouts it could handle.

Ireland received an 85 billion euro EU/IMF bailout in November, with around 18 billion euros of that due to come from the EFSF and 22.5 billion coming from the EFSM, a fund backed by European Union member states and also AAA rated.

Debt market analysts said the large order book for the EFSF bonds showed just how much appetite there was among investors for top-grade, AAA rated debt.

“Feedback we’re getting from accounts is that they’re welcoming this new asset class,” said WestLB’s Leister.

“They will be less liquidity than German Bunds or French paper but overall I expect them to have decent secondary market liquidity,” he said.

Additional reporting by William James and Alex Chambers; Writing by Stephen Brown and Christiaan Hetzner; Editing by Ruth Pitchford

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