February 8, 2012 / 7:33 PM / 8 years ago

Euro zone rescue fund eyes Feb debt sale

LONDON (Reuters) - The euro zone’s EFSF rescue fund is eyeing a return to the bond market at the end of February or early March to enable it to fulfill its next disbursement for Ireland, an EU source said on Wednesday.

Plans to leverage the fund’s capacity and give it more firepower to prevent the spread of the debt crisis were also progressing, with the first of two mechanisms it could make use of expected to be in place by the end of the month, according to the source with direct knowledge of the matter.

The European Financial Stability Facility (EFSF) is currently weighing its options and could issue a new T-bill in the third week of February or undertake a new syndicated bond issue, the source said.

Europe’s rescue fund raised 3 billion euros in January as confidence returned to the bond markets and the euro zone crisis abated.

The huge injection of liquidity into the European banking system by the European Central Bank at the end of December has also contributed to more favorable market conditions for issuers.

The EFSF would not just eye the three-year part of the curve, where liquidity has been abundant, but longer maturities as well.

“The impact of the LTRO (long-term refinancing operation) has also been on the five-year sector,” an EU source said. “There is strong demand for long dated paper and investors are starving for yield.”

The EFSF can issue up to 30-year maturities, although its longest bond to date is 10 years. The EU successfully tapped into long dated investor demand in January when it priced its inaugural 30-year bond.


The source also said that the EFSF hopes to have a guarantee scheme in place by the end of the month that would, if needed, insure around 20-30 percent of a country’s bonds - the first of two planned mechanisms to leverage the fund’s capacity and provide a firewall against the spread of sovereign stress.

The guarantee certificates would be issued by the EFSF separately to the bond, allowing the insurance to trade independently and act as protection against a default on all holdings of existing bonds from the issuer — avoiding the problem of a two-tiered market.

A second scheme, to provide an investment vehicle which would see the EFSF stomach the first slice of any losses on a portfolio of euro zone sovereign bonds, was likely to be up and running sometime in March.

“The fund would invest in bonds of the country in secondary or primary markets, and if there was a default on those bonds ... we would take the first loss,” the source said.

Both schemes could be deployed to provide support for sovereigns not in receipt of bailout programs, but experiencing difficulty raising funds on the market.

“We will be ready very soon, which is not to say that we would do anything yet, because we need to wait for the country to ask for assistance,” the source said.

A country would need to request help and receive approval from member states before either option could be used to provide assistance.


Meanwhile, the EFSF will be given more flexibility in its access to bond markets and will be able to raise money well in advance of when it has to be paid out. This change is expected to go through before the end of the month.

So far, the borrower has been hostage to market conditions when it has needed to bring deals. In November, the issuer had to delay a bond issue by a week as market conditions made it difficult to raise funds.

While pre-funding has the benefit of being able to access bond markets when conditions are at their best, it is also tricky as it mean having to park in very safe assets.

“As a result of this, the EFSF may have to face a negative carry and the EFSF needs to find a way to charge for this,” the source said. “Even if it comes at a certain cost, it is beneficial to be able to maintain some kind of liquidity buffer.”

Reporting by William James at Reuters, and Natalie Harrison and Helene Durand at IFR; Editing by Andrew Hay

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