Shifting To Short-Term Funding For EFSF Is A Sign Of Weakness
Comments from the EFSF's CEO Klaus Regling that they will issue short-dated debt to ensure they will be ready to help - for instance, Italy - is extremely worrisome and smacks of desperation in our view. Peter Tchir of TF Market Advisors agrees noting that shifting to shorter term funding for EFSF is a sign of weakness and creates real risk of contagion much sooner than if they stuck to the higher cost, but longer term funding programs. The dramatic widening in EFSF spreads that has occurred since some clarity on risk transfer, post EU summit, was made suggests market participants are extremely skeptical also.
I am really not sure how this is good news. Is there any doubt that the EFSF could issue short dated paper at low yields? No. What does this do? Keeps cost of funds down, but not sure how you leverage this - you can't. Second loss risk couldn't be based on short dated first loss risk.
All this would do is shift the roll risk from the country in need to the EFSF. I'm really not sure that is a smart decision. Save 2-3% in coupon in order to increase roll risk and ensure contagion?
This is clearly a "banker" solution and not a "trader" solution. I think this is a bad development.
On a side note, more and more banks are taking decent write downs on Greek debt, and guess what? The world didn't end. The shares aren't even that affected because they have been trading at a discount to book for over a year to reflect the mis-marking of these positions. How much better off would the system be if they had let Greece default a year ago? Time and again, no one addresses the problem, no one attempts to truly "fix" it, properly, with the costs associated with it, even though in hindsight, it would have been the right decision.
Shifting to shorter term funding for EFSF is a sign of weakness and creates real risk of contagion much sooner than if they stuck to the higher cost, but longer term funding programs.
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