Ireland may scream to the rafters that it’s funded until the second quarter of 2011 — but there’s a reason some eurozone leaders are pressing for it to tap Europe’s SPV.
The European Financial Stability Facility, created in the spring to assuage contagion from the Greek crisis, is not prefunded. That is, the money isn’t sitting in a pool somewhere, just waiting to be used. It needs to be raised — and as we’ve mentioned before — raising it in the midst of an EMU crisis could be trickier than many expect.
From CreditSights on Wednesday:
The €60 billion EU emergency fund is contributed directly by EU members states. The $440 billion European Financial Stability Facility (EFSF) is an SPV collateralised by borrowing countries IOUs with the liabilities are guaranteed by EU governments. And finally, there is a line of up to €250 billion of money from the IMF. The argument goes that because the lion’s share of the bailout fund is unfunded at this stage and debt issuance will be needed to provide the requisite funds, it should be proven to work at this early stage rather than being left until the last minute.
That said, there’s no reason Ireland has to be the first to use it:
But, it is not clear why Ireland needs to cut the ribbon on the EFSF (given that it doesn’t need to borrow until the middle of next year), rather than say Portugal that has €4.5 billion worth of debt maturing before the end of 2010. It is probably because, if the EFSF fails to find a bid for its liabilities (recall, the EFSF is not prefunded), then Ireland has time to work out alternative sources before it needs to borrow again in the middle of next year. The problem is that if EFSF bonds, collateralised by Irish (and EU guaranteed) bonds, fail to attract investors, then the negative impact to sentiment will push up borrowing costs for the other sovereigns (which do have near-term financing requirements) anyway.
Read that last bit again, because Europe’s SPV really might not be saving anything.
It is, however, still politically palatable for some. Countries like Germany could well prove more amenable to providing those guarantees rather than directly tapping the Deutsch-taxpayer. But with Ireland still resisting the measure (which would come with those IMF conditions) how ’bout a face-saving compromise?
Back to CreditSights:
There is however last minute talk of a compromise that will allow the EU to test drive its EFSF without forcing Ireland to undergo the ignominy of an IMF bailout … it is possible that the Irish government could replace some of the capital that is currently being provided via Irish government promissory notes with cash received from the EFSF. The idea would be to overcapitalize the banks (i.e. beyond the Financial Regulator’s stress tests) in the hope that it would restore investor confidence in the banks, allow them to return to the capital markets next year and reduce their reliance on the ECB. We do not believe the EFSF could lend directly to Ireland’s bank and so it would require that the government rakes the loans and pass the money on to the banks.
Better hurry though, Irish five-year CDS is already blowing back out to 545 basis points at pixel time, according to Markit data.
Related links:
EFSF, Ireland and a matter of contagion - True Economics
Europe’s EFSF really is not saving anything - FT Alphaville
Europe’s SPV – not saving anything? - FT Alphaville
SPVery complicated in Europe – FT Alphaville