By Jonathan Stearns – Dec 7, 2011
The euro area’s rescue fund plans to begin selling short-term debt by the end of the month to meet its expanded role in tackling the region’s debt crisis.
The 440 billion-euro ($589 billion) European Financial Stability Facility announced a funding program that will focus on three-, six- and 12-month bills. The first auction is expected to take place before year-end, the EFSF said in an e- mailed statement today.
The Luxembourg-based EFSF gained the authority in October to buy sovereign bonds on the primary and secondary markets, offer credit lines to governments and grant aid to banks as the region’s debt troubles spread. The EFSF’s sole role until then had been to sell bonds to finance rescue loans.
“The launch of a short-term funding program is in line with the enlarged scope of activity of the EFSF to use its new instruments efficiently,” Klaus Regling, the facility’s chief executive officer, said in the statement. “The bill program will not substitute for the long-term bond program, but it will add flexibility to it.”
The euro area is beefing up the EFSF in a bid to prevent Spain and Italy from being engulfed by debt troubles that forced Greece to seek an initial rescue in April 2010, pushed Ireland and Portugal into aid programs over the ensuing year and led to a second Greek bailout in late October. The larger EFSF role may also help to relieve the European Central Bank of secondary- market bond purchases undertaken over the past 19 months to counter increases in borrowing costs.
The EFSF is on the hook for most of the planned second aid package for Greece of 130 billion euros. The first Greek rescue of 110 billion euros was composed of loans directly from euro- area governments and the International Monetary Fund. Euro-area leaders decided to create the EFSF a week after the first Greek bailout in May 2010 in case other nations sharing the single currency ran into funding troubles.
The AAA rated EFSF is providing 17.7 billion euros under Ireland’s aid package of 67.5 billion euros and 26 billion euros under Portugal’s rescue of 78 billion euros. The facility’s funding strategy so far has been to sell “benchmark” bonds with maturities of five or 10 years.
In this context, the EFSF has sold a total of two five-year bonds and two 10-year securities, all this year. The most recent sale was on Nov. 7, when the EFSF issued a 3 billion-euro, 10- year bond to raise money for Ireland. Its sales of benchmark bonds are due to resume in 2012.
The EFSF’s bonds are on “CreditWatch negative” after Standard & Poor’s put 15 euro-region nations that guarantee the fund on review for downgrade, citing “systemic stresses.” Six countries in the euro region still carry the top rating from S&P: Germany, France, Austria, Finland, Luxembourg and the Netherlands.
The short-term debt program, which isn’t dependent on specific aid requests, will enable the EFSF to gauge more effectively the best timing for benchmark-bond sales, said Chief Financial Officer Christophe Frankel. It will also allow the facility to “be quick” should any request come for aid such as sovereign-bond purchases or credit lines, he said.
“We know we can raise funds in the short-term market at good conditions,” Frankel said in a telephone interview. “We want to use this program to promote flexibility.”
In the event the EFSF offers assistance through sovereign- bond purchases, the facility would sell debt with the same maturity as the securities it buys in order to “minimize risk,” he said.
The EFSF will probably announce in early January whether auctions of bills will take place regularly, according to Frankel, who said the facility has no target for what share of its total issuance will be accounted for by the short-term program.
“We need to know more about investor demand and wishes,” he said, adding that the EFSF will likely decide “in coming days” whether the first auction will be for three-, six- or 12- month bills.
Regarding three-month and six-month debt, the EFSF could decide to issue this by reopening 12-month bills or by selling distinct securities with those maturities, according to Frankel. Buyers of bills sold by the EFSF will be able to use them for repurchase operations at the ECB, he said.
“By introducing this program, we will now provide our investors with the opportunity of investing across the full yield curve,” Frankel said.