It just goes from bad to worse for Europe, which had been hoping to issue €5 billion in 15 year bonds to finance part of the Irish bail out via the EFSF. Instead, once seeing the orderbook, or lack thereof, Europe ended up slashing the notional by 40% and the maturity by 33%, to a €3 billion issue due 10 years from now. And that is hardly the end of the concessions. As the FT reports, "The bond from the European Financial Stability Facility will only target €3bn, instead of €5bn, and will be in 10-year bonds rather than a 15-year maturity because of worries over demand. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity. Banks hired to manage the deal are Barclays Capital, Crédit Agricole and JPMorgan." Do you see what happens Larry, when China walks? But so we have this straight, Europe plans to fund a total of €1 trillion in EFSF passthrough securities.... yet it can't raise €5 billion? Just.... Priceless.
One banker said: “There is so much uncertainty over the EFSF that it will be much harder to sell than it was earlier in the year, when we saw massive demand from European funds and Asian accounts. Japan and China bought in big size earlier in the year. We are not sure we are going to see that type of demand this week.”
Bankers said the bond, which is expected to price on Wednesday, may struggle to attract interest in spite of Klaus Regling, thead of the EFSF, launching a charm offensive in Asia last week to encourage interest.
Already delayed from last week, EFSF officials decided to price this week because market conditions could deteriorate if they held off any longer.
The bond is expected to price at yields of about 3.30 per cent, and about 130 basis points over Germany, the European market benchmark. This is a big mark-up since the middle of September, when existing 10-year EFSF bonds were trading around 2.60 per cent and only 70bp over Germany.
China makes good on its threat to not be perceived as the dumb money any more:
Bankers say earlier in the year Chinese and Japanese investors had been big buyers of EFSF bonds on the basis that they were triple-A rated with a big premium over Germany, which was seen as a risk-free premium.
As for the levels, regulars know that EFSF spreads have blown out to records lately, meaning that as less demand materializes, spreads will have to go ever higher, in the process obviating the advent of reality courtesy of a French downgrade. It seems the market has already priced it in!