Eurozone rescue efforts are not convincing the markets
A rather disturbing point is made by Mike Riddell of M&G Investments.
The European Financial Stability Facility is underwritten by eurozone members and issues bonds. The proceeds from these bonds are used to fund the governments of Greece, Portugal and Ireland. The EFSF’s new powers, presently in the process of being ratified by European national parliaments, will enable it to preemptively buy the bonds of nations at risk of speculative attack such as Spain and Italy and also to recapitalise European banks.
Those bonds should, in theory, be very attractive because of that blanket guarantee by all eurozone governments. Yet Mr Riddell points that the 13bn euros in bonds issued by the EFSF so far this year are less favoured by investors than the bonds of the strongest member states, as a comparison of yields shows:
The higher the yield, the less attractive the bond. And as this shows the EFSF bond’s yield is higher than German, Dutch and even French bonds. The bonds are hardly trading at distress levels. But it’s worrying that the pan-eurozone rescue fund is seen as more risky than the German government.
Mr Riddell’s explanation:
“Investors need to be persuaded to part with billions of euros to invest in a vehicle with an ever-expanding mandate that lends money to European governments and banks at precisely the time when the market has decided that those governments and banks are insolvent.”
In other words, the financial markets are far from convinced that the European governments have the political will to keep the eurozone together.
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