25th Oct 2021

Investors flock to EU bail-out bonds despite downgrade

  • Tokyo bought eight percent of the EFSF bonds (Photo: stefan)

Eurozone's rescue fund on Tuesday (17 January) managed to sell €1.5 billion worth of short-term bonds at low borrowing costs, despite having lost its triple-A rating one day before.

The German national bank, who conducted the sale on behalf of the European Financial Stability Facility (EFSF), said the auction of six-month bonds drew bids three times their value, at an average yield of 0.2 percent. Last month, the Luxembourg-based fund met similar solid demand for €1.97 billion worth of three-month bills.

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The result was keenly awaited after Standard & Poor's on Monday downgraded the EFSF from AAA to AA+. The downgrade followed the US-based agency's decision last week to cut ratings on nine eurozone states, inlcuding two previously triple-A countries, Austria and France, which help underwrite the EFSF.

A spokesman for the EU commission on Tuesday said the EFSF downgrade was a "mechanical consequence" of S&P's earlier decision on the group of nine. He aded that the EFSF has more than enough resources to cover the needs of the three current EU bail-out recipients - Greece, Ireland and Portugal.

But he noted that if the EFSF expands the scope of its intervention - a reference to the possibility it will in future buy Spanish and Italian debt - it might need more money.

"It is appropriate to strengthen the fire-power of these instruments, to have a preventing dissuasive effect, reassuring markets that we are capable to cope with the situation. When we decided to broaden the spectrum of possible act for EFSF, we opened the door to other uses which may require extra finance, but currently this is not necessary," Amadeu Altafaj Tardio said.

Meanwhile, the Japanese government - one of the buyers in Tuesday's auction - voiced strong public support for the EU fund.

Finance minister Jun Azumi told reporters that S&P's new rating has not influenced Tokyo's purchasing of EFSF bonds, which are still seen as "valuable assets."

According to Dow Jones, Japan bought €120 million worth of the bonds, around eight percent of the bills available. Earlier this month, Tokyo bought 10 percent of three-year EFSF bonds. It currently holds €3.7 billion of EFSF debt.

In a separate auction also on Tuesday, Spain saw its borrowing costs on €5 bilion worth of one-year bonds plunge by 50 percent, down to 2.04 percent from 4.05 percent last month - another signal that S&P has not destroyed market confidence in the euro.

One expert warned that the good news will be short-lived unless Germany allows the European Central Bank (ECB) to buy more distressed euro debt and unless wealthier euro countries start spending agains instead of focusing on auasterity alone.

"We need a change of heart and strong support from the ECB. Some countries, like Greece, have to pursue austerity, but countries which run surpluses - Germany, the Netherlands, Finland, Austria, even France - shouldn't do austerity at all, they should implement stimulatory measures," Andrew Watt, an economist at the European Trade Union Institute, a Brussels-based research centre, told this website.

Italian Prime Minister Mario Monti made a similar call on Tuesday.

He told the Financial Times it was in Germany's interest to help lower the burden of debt refinancing for Italy and other struggling states. He also said Europe's north had not sufficiently acknowledged the efforts being made by highly indebted nations to reduce their deficits.

Another analyst agreed the ECB should do more, but said austerity is the only way out of the crisis for now.

"It's all about buying time until austerity bears its fruits. It's the only thing that will work. Even if Germany was to spend more internally, it would not help in the short term," Carsten Brzeski, a senior economist with ING Bank told EUobserver.

Brzeski downplayed the consequences of the EFSF downgrade, noting that the US also lost its triple-A rating last year: "If you are AA+, you are not close to insolvency, you are just one notch lower. The bond sale today is a clear evidence that the investor community does not pay too much attention to ratings."

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