Moody's Says EFSF Unable To Support EU Bonds, Sends EURUSD Lower

Tyler Durden's picture

Given the extent of our discussions both today and over the last two weeks of the EFSF, Moody's confirmation of all that we have said should come as no surprise. In their Weekly Credit Outlook the rating agency, that hasn't accidentally downgraded FrAAAnce recently, cites weak demand and investor's cold reception of proposals as betraying the limits of EFSF's powers. This development calls into question the ability of the EFSF to fund itself in the markets at low cost. The success of the EFSF as a tool to stabilize sovereign debt prices and the success of the current euro area-wide support mechanism comes into doubt if that ability is compromised. Clearly traders are also starting to wake up to this reality as EURUSD drops below Friday's close and given the size of sovereign issuance on deck this week, it is not surprising.


Weak Bond Demand and Investors’ Cold Reception of Proposals Betray Limit of EFSF’s Powers

Last Monday’s €3 billion, 10-year bond issuance by the European Financial Stability Facility (EFSF) was met with significantly less demand than a similar bond issuance on 15 June, and priced at 177 basis points (bps) over 10-year German Bunds, versus 51 bps in June. Investors’ cool reaction to proposals to leverage the EFSF’s lending capacity (through partial default insurance and/or a special-purpose vehicle, or SPV) contributed to the weak demand, although fundamentally, these leverage options will not affect the EFSF’s creditworthiness. Both the pricing of the EFSF’s last issuance, and the lack of progress in leveraging its lending capacity, display the limits of the EFSF’s ability to support European government bond markets.


The rise in EFSF spreads is an important signal because it reflects a rise relative to the spreads of its Aaa-rated guarantors. In theory, EFSF spreads should be below the weighted average spread of its Aaa-rated guarantors, since EFSF issuance is 100% covered by guarantees from Aaa-rated sovereigns and also benefits from guarantees from non-Aaa-rated member states and from the underlying borrower’s repayment obligation.


As shown in the exhibit below, the spread of other Aaa-rated euro area countries to Bunds has risen to 58 bps on 7 November from 20 bps on 15 June. Therefore, only 30% of the increase in the spread on the EFSF issuance (38 bps out of 126 bps) is explained by the rise in the spreads of its Aaa-rated guarantors. Further, while the EFSF bond spread remains significantly lower than the weighted average spread of all its guarantors, it has moved further away from the Aaa guarantors spread and closer to the all-member spread during the past six months.




We note that the auction took place at a time of significant uncertainty created by the political turmoil in Greece and, to a lesser extent, Italy, which inevitably depressed demand for euro area debt. Moreover, the rise in EFSF spreads mirrored a significant increase in the spread on French government bonds. In this context, the demand for the EFSF bond issuance was dampened by a lack of confidence over the credit resilience of its guarantors. Moreover, the uncertainty created by the proposed mechanisms to leverage the EFSF’s lending capacity contributed to the weak demand. So it would be wrong to draw too many firm conclusions from last week’s auction regarding investor demand for EFSF debt in an environment in which there was a clear, shared commitment to maintaining the euro area intact.


Nevertheless, this development calls into question the ability of the EFSF to fund itself in the markets at low cost. The success of the EFSF as a tool to stabilize sovereign debt prices and the success of the current euro area-wide support mechanism comes into doubt if that ability is compromised.


These concerns are amplified by a lack of progress on the two proposed leverage options as investors remain reluctant on both partial default insurance and an SPV. Against the backdrop of the proposals on Greek private sector involvement, investors expect that the suggested 20% protection (either by collateral or by an equity tranche in the SPV) will not necessarily cover them in case of a default. As a consequence, the proposals are unlikely to generate significantly greater demand for euro area sovereign debt.


With its current lending capacity (which is at about €266 billion considering commitments to Ireland, Portugal and Greece), the EFSF cannot meaningfully support the euro area’s large government bond markets. This limits the EFSF’s role as an important pillar of the euro area crisis management strategy.

Chart: Bloomberg

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X.inf.capt's picture




HyperLazy's picture

Got PMS? Heavens no, I don't menstruate. But I have heard that the new Euro Bonds are 20% more absorbent.

eigenvalue's picture

I expect markets to close higher once again today. Even God will live long enough to see the End Game...

Fips_OnTheSpot's picture

The plot thickens.. "EFSF has failed, we need ESM!!1" - and make Germany a total slave to Bruxelles. Doomed.

TruthInSunshine's picture

There are two choices, period.

Either Germany goes along with what's going to be a bad plan (for Germans and the rest of the EU) and:

1) Authorize the ECB to print an amount of EUR that will make The Bernank blush (and that's saying something), which will absolutely crush european consumers and business not having the predominant portion of their business operations geared for exports (and even these such businesses will ultimately get dinged badly as price inputs either kill their margins or kill their volume of sales); or

Germany does the more sensible thing (for Germans and whatever is left of the EU, and if just a small core of more solvent nations, or no real integrated, common-currency union is left, that's fine, too, given how FUBARED the EU is as of now) and:

2) Essentially gives buzz cuts to bond holders of PIIGS+France+UK debt (sovereign and both private and 'nationalized' banks), while re-writing the rules for admission/retention in the EU to reflect a significantly more stringent financial litmus test, and one that must be met on at least an annual basis (including deficit spending as a percentage of GDP, using real, verifiably accurate numbers, as just one measure).


There's no way around deleveraging. It can either be drawn out and painful, creating a death by a thousand paper cuts, or it can be violent and swift, resulting in a torrent of blood flow, but the violent and swift method at least allows the clearing process to take place rapidly and gives underwater economies the ability to reset and start growing in a real and sustainable fashion once again, and new and far more stringent financial controls will ensure that they don't just end back in the habits that created their crises in the first place.

And if 20% or 30% of the banks go down, good riddance. There are way too many banks as it now stands, and that thicket of dead wood needs some serious culling.

Counterparties to banks that go bye-bye will have to take the hit, whether hedge funds or mutual funds or pension funds or private investors: Investment carries risk. That The Bernank & Geithner (and Paulson) bailed out the sorry asses of those who were counterparties to the likes of AIG (as just one example) is not just reckless and incredibly anti-capitalist, but criminal, since they essentially used taxpayer dollars and critically wounded the real economy in doing so.

The Bernank broke all markets, in a quest to avoid taking the medicine that would have helped treat Greenspanbubblei-itis, and worse yet, the brilliant trifect of Paulson-The Bernank-Geithner then made matters worse in 2008 by kicking the can, giving trillions of taxdollars to useless financial institutions, who are now zombies that are eating the brains of consumers and real business on main street.

The Bernank Broken Zombified Markets.


longonSpam's picture

Way too many banks?!?!? Uhh okay.. so we go from 6 to 2?

JPMorgan Stanley Sachs of Gold Man

GoFar with ShitiBank of Amerikkka

TruthInSunshine's picture

Way too many banks as in thousands of banks.

Even if this was not the case, and there were only 6 as you stated/implied, cutting 30% would leave closer to 4 rather than the 2 you stated.

longonSpam's picture

I can't wait for Cramer & Kudlow to announce that everything is back to normal & shill more worthless common stock.. 'Heres some nice shiny Monsanto & Caterpillar to piss away your fiat'..


Tuffmug's picture

EFSF = European Farcical Shitstorm Fix

Threeggg's picture

Going long tree's and Ink !

...........................and bearing grease.

ACP's picture

Long mini S&Ps, big S&Ps, euros and whatever else Bernanke is buying.

Dick Darlington's picture

EFSF - shooting peas since 2011

nathan1234's picture

NO condom works for the EFSF

They get pricked when used or have manufacturing defects so they dont work at all.

In short it is already FUKED

Dick Darlington's picture




Element's picture

So ... this is bullish right?

Element's picture

hmm, yeah ... more cash = growth! ... wheeeee!  ... less is not more ... more is more


EDIT:  I especially liked this bit, in light of inventories ballooning ... again;

Mike Ryan, New York-based chief investment strategist at UBS Wealth Management Americas, which oversees $715 billion, said in a phone interview Nov. 9. “But access to funding is no longer a problem. There’s willingness to lend, there’s a sense that balance sheets are in good shape and a sense that default rates are going to remain low.

Mike2756's picture

Of course they're sharing it with their employees, they get to keep the rope.

gianakt's picture

Chinese spotted selling Euro's on heavy volume!!!