The European Financial Stability Facility finally got its €3bn 10 year away on Monday and there will be relief all round that it was able to do so.
However, its rigid funding strategy forced it into a do-or-die bond deal that it got away with — just — but which has made things a lot worse for those borrowers in the sector with funding still left to do.
The deal has a whiff of wet dog about it. Despite offering a triple-digit spread over mid-swaps for sovereign guaranteed paper, it was hardly a blow-out.
How will that serve as a pricing comparable for other sovereign, supranational or agency borrowers wanting to print a euro deal at the long end of the curve?
At least one other SSA borrower expressed frustration to EuroWeek at the EFSF’s elephantine presence in the market on Monday and felt its own ambitions in the sector were now damaged. Investors’ appetite for 10 year paper is sated — and at much wider spreads than many SSA names could countenance.
Bank Nederlandse Gemeenten was the last SSA to print a euro 10 year, selling a deal at 40bp over in October. The European Union and European Investment Bank priced their last 10 year euro trades at 20bp over in September.
Admittedly, volatility is much worse now, but who would come to market with a 10 year after the EFSF has struggled with a spread more than five times where the EIB last priced?
Had the EFSF had other proven options open to it, as nearly every issuer in the capital markets has learned over the past several years, it could have avoided having to force a 10 year deal through a market that obviously wasn’t comfortable with the idea.
Confronted with last week’s extreme volatility, it could have borrowed short term cash and waited a month or two until issuance conditions, not to mention the political situation, settled down. If calmness did not follow, it could at least have rolled over the short term funding.
EuroWeek understands that the rescue vehicle is putting in place a short term instrument programme to be ready for December. However, the EFSF’s political masters should have worked harder, and earlier, to provide the rescue fund with funding alternatives, such as money markets.
Instead it had little choice but to press on with a public deal in appalling market conditions.
The EFSF has its funds, but at what cost to the health of its SSA peers?