European SPV, meet Russian playwright | FT Alphaville

European SPV, meet Russian playwright

Reflection time on Europe’s sovereign debt crisis: we now have a European Financial Stability Facility. So will we see it used?

Er… pass for now, says Barclays Capital’s Aziz Sunderji and team:

There is not enough clarity in government bond markets to be able to credibly answer this question. This week saw shaky auctions from Belgium (1.4 bid cover) and Austria, followed by strong auctions from Portugal (1.8 bid cover) and Spain (2.1 bid cover). It is unclear what is motivating the marginal buyers of government debt, or whose these buyers are…

Well, having the European Central Bank as a buyer of last resort might help.

But with debt markets currently getting by one auction at a time, BarCap have tried a bit of contingency planning:

A failed auction, or one that is only achievable at yields that are too high [BarCap have previously suggested 6 per cent] could cause a euro area country to ask for borrowing under the EFSF. Some investors likely feel that such an event would reveal the inoperability of the plan; we do not agree but feel that activation of the EFSF would nevertheless cause tremendous uncertainty and substantial spread widening in both sovereigns and corporates.

We aren’t at six per cent yields yet, as BarCap’s related chart shows:

But we may be at the foot of a long secular transition to yields close to that point, BarCap adds. European sovereigns will take years to fiscally adjust, but the escape pod of the EFSF will be in the background throughout.

Except… that chart doesn’t show Portugal.

This is curious, in that Portugual paid a yield of 5.225 per cent on its 10-year issue this week, the FT reports. That’s not far off, so this yield is one to watch.

Now, Portugal’s finance minister has already said that his government isn’t going to access the EFSF any time soon. Spanish and EU officials also squashed FT Deutschland’s report on Friday that Spain is preparing to access the facility.

But at the same time, now that the liquidity backstop is here, and so long as markets stay on edge — and so long as the ECB appears to stay away from more bond-buying, which would drive yields down — we’re stuck in this uncertainty.

In which case, it’s hard not to see the EFSF as the sovereign finance version of Chekhov’s famous gun:

If in the first act you have hung a pistol on the wall, then in the following one it should be fired. Otherwise don’t put it there.

—- Anton Chekhov, Reminiscences, 1904

Related links:
SPVery complicated in Europe – FT Alphaville
Europe’s grim sovereign-bank loop – FT Alphaville
A collateralised eurozone debt obligation? – FT Alphaville