Euro-zone bailout fund struggling to find demand

The European Financial Stability Facility (EFSF) was barely able to find a sufficient amount of orders for its new EUR 3bn 10-year bond issue. The issue was characterized as being just subscribed, i.e. the size of the order book was likely just over the issue size of EUR 3bn.

Even these orders were received after price concessions. Initial price thoughts moved in the 50bp area vs. mid-swaps yesterday. Order books were opened today at 54 to 57bp vs. swaps, and the guidance was later revised to 57bp, which was also the final pricing level.

It is good to note that as the EFSF and its successor ESM (European Stability Mechanism) will play an important part in the upcoming support scheme involving also the ECB (an EFSF/ESM programme will be a prerequisite for ECB interventions on the secondary markets), it is important that their bonds continue to find demand. One can thus only hope that today’s EFSF bond sale was an exception. More reassuringly, the EUR 5bn 5-year benchmark launched last month gathered an order book of close to EUR 8bn, which was the largest issue from the EFSF so far (priced at 50bp above mid-swaps).

At a minimum, today’s weak bond launch suggests the EFSF will have to pay a higher premium for its bond issues in the future, which will also turn into higher funding costs for the countries receiving financial aid through the facility. Even though the effect of such higher costs is likely to be rather limited, future bond launches from the EFSF definitely bear watching. This piece of news was certainly not welcome in the current uncertain environment.

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