Business World

Saturday 25 February 2017

EU bailout fund shrugs off downgrade to raise €1.5bn

Donal O'Donovan

Donal O'Donovan

European Financial Stability Facility is charged interest of just below 0.3pc one day after ratings cut

THE main European bailout fund that finances Ireland's government spending shrugged off a ratings downgrade to raise €1.5bn in the money markets yesterday.

The European Financial Stability Facility (EFSF) borrowed the amount in six-month IOUs or 'bills', the term for very short-term bonds, at an auction managed by German officials.

The fund paid an interest rate of just 0.2664pc for the cash despite the auction being held one day after ratings agency Standard & Poor's downgraded the fund's long-term credit rating from AAA to AA+.

The deal was done as Klaus Regling, who heads the fund, dismissed speculation that the eurozone could break up.

European officials said the EFSF plans to hold on to the cash raised yesterday as an emergency fund to cope with any sudden request for financing from Ireland or Portugal, its only current borrowers, or if another European country needs cash for its banking sector.

If Ireland does draw down any of the newly raised cash, the Government here will have to pay just 0.1pc extra in interest to borrow from the bailout fund.

However, Ireland would look to borrow that cash for much longer than six months. That would force the EFSF back to the markets to replace its six-month borrowings with long-term bonds that better match the Government's needs.

That extra complication arose because the EFSF was never supposed to borrow over such short terms.

It only opted to raise short-term debt late last year after a bond deal was cancelled at short notice back in November when money markets clamped shut to almost all borrowers.

The crisis in November left bailout officials scrambling to ensure that cash was available for Ireland and Portugal. Since then, the EFSF has used short-term bills to ensure it always has some cash available.

Success

Regardless of the complications, yesterday's deal was seen as a success in the markets. The EFSF paid less to borrow than France paid on Monday.

The price fell thanks to strong demand for the bonds from investors including the Japanese government. Investors were bidding to buy three times more of the bonds than were actually sold.

The real test of investor demand will come when the EFSF tries to raise long-term debt, not least because the S&P rating downgrade didn't affect its short-term borrower rating.

The future of the bailout fund itself is in doubt anyway. The EFSF is due to be replaced by a permanent European bailout fund in July, but some officials argue that the EFSF should be kept running alongside the new rescue fund at least until 2014.

Having two big bailout funds could be one way to get around the €500m limit that Germany, in particular, insists is as much as it's prepared to see committed to rescuing the euro.

Irish Independent

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