Friday 15 December 2017

EFSF's costs fall despite Greek debt negotiations

The Eurozone's temporary crisis resolution mechanism has seen its long-term funding costs plunge despite Greece being in the midst of debt negotiations
The Eurozone's temporary crisis resolution mechanism has seen its long-term funding costs plunge despite Greece being in the midst of debt negotiations

Abhinav Ramnarayan

The Eurozone's temporary crisis resolution mechanism, which helps Ireland, has seen its long-term funding costs plunge at a time when the biggest recipient of its support, Greece, is in the midst of tense negotiations with other Eurozone nations about its vast debt pile.

The European Financial Stability Facility priced a €1.5bn 30-year bond with a coupon of 1.2pc, a dramatic fall in funding costs for the body set up in 2010, when even top rated sovereigns were paying three times that.

"A 30-year bond helps support some of the longer-term loans that we have disbursed," EFSF's head of funding, Siegfried Ruhl, told Reuters this week.

EFSF's long-term loans include those dispersed to Ireland, Portugal and Greece. The Greek loans amount to €141.9bn maturing at different times over a 30-year period from 2022 to 2052, and the interest rate Greece is charged is linked to EFSF's funding costs.

The EFSF does not disclose further details on how that interest rate is calculated, but analysts at Societe Generale have provided an estimate.

"The actual average lending rate from EFSF loans is linked to the borrowing cost of the EFSF/ESM without fees and stands at 1.5pc for an average maturity of 32-years," the analysts said in a note.

But since the interest payments only kick in from 2022 - they were deferred by 10 years in 2012 - the current low rate of funding will not help Greece in the short term.

Even in the longer term, it is not clear if Greece will see much benefit from the current low rates, as the EFSF's funding costs may rise in the future as economic recovery gathers pace.

The low rate at which the EFSF is currently funding itself has led some to suggest that the agency could pass on more of the benefit to Greece.

"The debate at the moment is whether or not to fix the interest rates at current levels - that is one of the things that is being negotiated," said one analyst.

"With rates expected to rise in the coming years, fixing the interest level now could bring some relief to Greece once the payments kick in," he said.

Irish Independent

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