Of European Insurance Funds and Short-Dated EFSF Issuance

Tyler Durden's picture

We have discussed the obvious lack of demand for EFSF paper in the last few weeks and note that Friday saw the longer-dated issue break above 4% yield - clearly indicating the market's unwillingness to 'believe' in the AAA rating (and therefore any explicit wrapper that may evolve from this entity). Peter Tchir, of TF Market Advisors, notes the headlines and rumors are already coming in fast and furious.

Looks like tradeable insurance certificates.  We analyzed a lot of the issues with the various proposals and should now be able to refine the analysis as details come out.

Also in the list of headlines was an indication that the EFSF was going to start issuing "bills" which seems to indicate very short term funding.  This is a very bad move in my opinion.  We already have a solvency crisis, there really hasn't been a liquidity crisis for any of the borrowers (6% 1 year paper is not good, but it isn't a full blown disaster either).  If the EFSF starts needing to roll short dated paper we are getting set up for both a liquidity and solvency crisis.  Trying to save 1% - 2% in interest costs is part of what got us to this point in the first place.

The switch to short dated funding is also a sign that there is not much (any) demand for EFSF paper.  French bonds are weak, Germany couldn't get to full size on a deal, existing EFSF paper is quickly becoming the "short" position of choice, EIB and KFW already provide cheap alternative ways to own German, or EU "guarantee" risk.

An Italian newspaper claims that the IMF is working on a 600 billion Euro bailout plan for Italy.  It sounds interesting, and is almost double given what the IMF says it has available on their own site.  Are ideas like this being talked about?  Probably.  Are they likely to be implemented now or in the near term?  Not really.

European leaders clearly saw how weak the market closed every day last week (futures accelerated to the downside after 4 pm) and are trying to talk up the market and really getting close to actually planning things that should have been implemented months ago.  It will be a hectic week, and there is a chance a real plan that could really work emerges, but we remain highly skeptical of that and will continue to use overly optimistic rallies to get shorter.