Apparently EuroWeek is more or less the only capital markets institution not to place orders for the Eu5bn European Financial Stabilisation Facility deal in the market on Tuesday. The leads report Eu44.5bn of orders, and inflated or not, that’s a pretty good book. Coming at a healthy spread to Bunds, with an explicit joint guarantee from eurozone member states, it looks like a bargain.
But it’s really just a bet on the willingness and ability of Europe to bail itself out — the guarantee from the eurozone member states is worth as much as their commitment to lend money to the troubled peripheral states. The “unconditional and irrevocable” guarantees are nothing of the kind. Sovereigns (the clue is in the name) definitely can revoke guarantees. Can you see austerity Europe stepping up to a big bailout? Big transfers would be political poison, whatever the method.
And if you believe that the EU won’t let the periphery down, why mess around with the EFSF? Why not buy Greek or Irish bonds and see a decent upside?
Look again at the nightmare predictions that did the rounds when the various sovereign crises were erupting. If the eurozone does break up, where does that leave holders of EFSF debt? What country could regard its EFSF guarantees as equivalent to its sovereign debt?
Meanwhile, peripheral economies are still trapped in deflation, with little hope of economic growth and fractured banking systems. The EFSF can reshuffle which countries end up paying for the eurozone’s troubles, but it can’t make the troubles go away