The world backs away from Ireland, Spain, Portugal | FT Alphaville

The world backs away from Ireland, Spain, Portugal

There’s something missing from the Russian Finance Ministry’s website.

Via Google Translate:

Ireland and Spain are no longer eligible for investment by Russia’s two sovereign wealth funds — a canny spot by Bloomberg. The two countries still appear on the Ministry’s English language website, which we assume has not yet been updated.

And such retreat could not have come at a worse time for eurozone peripherals. Yields on Irish 10-year bonds have risen 132 basis points since mid-October to 7.44 per cent. And 10-year bonds from Portugal — which saw a lacklustre bond auction on Wednesday– are up 55 basis points in the same period to 6.29 per cent. And yet —  even with such enticing high yields in an (increasingly) low-yield environment — it seems investors like Russia’s €130bn-strong SWFs just don’t want it.

This is of course is a bit of a problem for peripheral Europe. Without traditional investors left to support their debt they may well have to turn to the European Financial Stability Facility (EFSF) . The headline number here is €440bn, but because of the facility’s structure available funds are likely to be a lot less.

We hear from Deutsche Bank, for instance, that EFSF reps were in London last week presenting to investors, and “clarifying” that the €440bn includes the 20 per cent extra guarantees. That plus a withdrawal by Greece means that the €440bn is already reduced to €428bn. According to Deutsche then, the maximum funding figure is about 1/120 per cent of that, or €356bn. Given that currently 72 per cent of the guarantee volume is covered by triple-A-rated countries, that would imply the EFSF can only lend some €257bn if it is to maintain its own triple-A rating.

But even deploying that €257bn might be a difficult exercise, to say the least.

From Gary Jenkins at Evolution Securities:

Ireland does not have pressing immediate funding needs, with cash holding expected to cover spending requirements until mid 2011. Portugal needs to raise in excess of €30bn of funds in 2011 according to our estimates, with nearly €20bn of redemptions in H1 (bonds and bills). If investor confidence continues to fade, it is probably only a matter of time before one of the more fragile Eurozone countries will need to request the support of the European Financial Stability Fund (EFSF). If this were to happen then the key might be just how much issuance the EFSF would need to undertake. If the amounts involved were significant then the pricing of the securities would be a very delicate matter. Yields too low and you may as well buy Bunds. Slightly too high and it might discourage investors from purchasing the likes of Italian and Spanish bonds. After all, if the yield levels are similar why not buy the German quasi guaranteed debt? This is one reason why the EU would no doubt prefer not to utilise the EFSF, because if they do it will be a very difficult balancing act.


Related links:
Everything’s rising in eurozone peripherals… – FT Alphaville
Europe’s EFSF really is not saving anything – FT Alphaville