If there is one borrower that absolutely cannot afford a failure, it is the European Financial Stability Facility (EFSF). It is Europe’s lifeboat. It only enters the market in stormy conditions with the sole purpose of rescuing stricken sovereigns. If it goes down, we really are in a lot of trouble.
It will be in the market this week with a long 10 year deal having backed away from its preference for something longer, expressed last week. Its willingness to respond to investors is a good thing — but the trade is by no means a guaranteed success.
Some have commented that the fact that the EFSF is printing shorter than hoped and smaller than in previous deals is a sign of weakness. This is wrong. It has said for weeks that it only wants to print €3bn, and only the most stupid borrower would try to steamroll its banks into printing that sort of volume in a maturity where there are no bids.
There would be a case to answer had the EFSF switched from 15s to wanting to print a two year deal, but to change to a long 10 year is hardly demonstrative of a lack of confidence. The EFSF has been sensible in its choices.
Where the problem lies is the ambiguity surrounding the EFSF’s future. Klaus Regling, the EFSF’s CEO, has been drumming up support in China. His deputy, Christophe Frankel, will also have been trumpeting the cause — as they have done so relentlessly and so well for the past year or so.
They are limited as to what they can say. With European nations unwilling to stump up more for the vehicle, it is unlikely to be appealing to those outside the region, even if it is in their interests to avoid a total collapse of the euro system.
Moreover, until politicians reach a proper agreement, investors do not know what sort of leverage the EFSF will have to offer to European sovereigns nor how its bond-buying SPIV will work in practice. For its part, the EFSF has been keen to point out that neither mechanism will alter the entity’s borrowing requirement or its triple-A rating — the argument being that bond investors should therefore view the entity as before.
But it is unarguable that Europe is planning to deploy a wildly different bailout vehicle from the one conceived during the Greek bailout negotiations of Spring 2010. It's worth remembering that back then we were told it was unlikely the EFSF would even have to come to the bond market at all.
EFSF 2.1 as drawn up in July was out of date almost before it had been fully ratified by October. Against that backdrop, how can anybody be sure about what they are buying into now?
Considering the deteriorating European debt market — Italian 10 year yields (un)comfortably above 6%, for example — the future of the EFSF needs clarifying urgently and with certainty.
Work is underway to do this and it is doubtful a borrower as astute as the EFSF would try and come to the market in such dire conditions without some reassurance that its deal will sell. But if Europe wants to see spreads back in towards the single digits over Libor seen in the EFSF's inaugural trade, rather than something closer to the 100bp spread touted for a 15 year deal last week, the EFSF and its investors must know precisely what the entity is about.