Euphoric markets rally behind first euro debt issue

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The debut bond from Europe's financial rescue fund attracted robust demand on Tuesday (25 January), in the latest sign of confidence the bloc is getting to grips with the debt crisis that has haunted it for over a year.

The successful bond sale by Europe's bailout fund, the European Financial Stability Facility (EFSF), further eased pressure on the euro.

Describing interest as "exceptionally strong," the EFSF said its bond sale had attracted orders from more than 500 investors totalling 44.5 billion euros – roughly nine times the five billion euros of paper on offer.

"It was a big vote of confidence in the EFSF," said Eurointelligence, a website providing authoritative commentary and analysis on the euro area.

Demand from Asian investors was particularly robust, with the Japanese government buying over 20% of the issue.

"The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area," said the EFSF's German Chief Executive Klaus Regling.

"It may well be a turning point," Regling told a news conference in Frankfurt. "The idea that the euro might disappear, that the euro area might disintegrate, is absurd, and more and more people in the market are realising this now," Regling told reporters.

Funds raised from the five-year bond will be used to help finance the bailout of Ireland, which followed Greece last year in seeking a rescue to cope with a financial meltdown in its banking sector.

Changes to rescue fund due in March

Weeks ago, fears were rife that eurozone contagion would spread from Ireland to Portugal and Spain, stretching the 440-billion-euro EFSF to bursting point.

But European leaders are now contemplating changes to the rescue fund which have helped calm jittery markets. The euro has risen seven cents against the dollar over the past two weeks to reach a two-month high above $1.36.

And the risk premiums investors demand to hold Portuguese and Spanish debt instead of rock-solid German benchmarks have fallen back, although they edged higher in thin trade on Tuesday.

Among the steps eurozone leaders are considering is an increase in the effective capacity of the EFSF, which for technical reasons can only lend about 250 billion euros, and giving it new powers to buy bonds directly or make loans to troubled countries, possibly so they can buy their own bonds.

Other ideas include reducing the interest rates Greece and Ireland are forced to pay under their rescues. Many economists believe Greece and Ireland, which are both pushing through draconian budget cuts, will ultimately be forced to restructure their debt unless new steps are taken to relieve their burden.

The changes, which are being worked out by a little-known committee of national technocrats and lawyers in Brussels, are expected to be agreed at a March summit of EU leaders.

Germany pushing for EU 'debt-brake'

But Germany is resisting pressure from its partners to implement quick changes to relieve struggling euro members, in part because they might be frowned upon by German voters, who will go to the polls in several states in the coming months.

Speaking in New York, German Deputy Finance Minister Joerg Asmussen said lower interest rates for Greece and Ireland were a possibility, but only if the countries were willing to enshrine new fiscal rules in their constitutions. Germany has been pushing its eurozone partners to adopt the same "debt-brake" rule it introduced in 2009, but faces fierce resistance.

French President Nicolas Sarkozy came out in favour of an EU-wide adoption of constitutionally-bound debt brakes in June last year.

Political backlash

Tough austerity programmes are raising pressure on eurozone politicians and sowing doubts about whether governments will stick to ambitious savings goals as voters turn on them.

Irish Prime Minister Brian Cowen is expected to be booted out of office in an early election next month and the parties likely to form the next government are vowing to renegotiate aspects of the country's EU/IMF rescue deal.

Spanish Prime Minister José Luis Rodriguez Zapatero has won plaudits from the markets for his economic reforms, but with unemployment rising, his party faces a drubbing in crucial regional elections in May and a national vote next year.

Europe's largest economy, Germany, remains an exception. Last week the government raised its 2011 growth forecast to 2.3% and on Tuesday, data showed consumer morale pushing up to its highest level since October 2007.

Against this complex economic and political backdrop, European leaders may struggle to reach a consensus on the "comprehensive package" of anti-crisis measures they have promised to unveil at a March summit.

Berlin is pushing for closer economic coordination, but only on its own terms. It would also like to see more automatic sanctions for deficit sinners.

Ahead of a meeting with Merkel at a German government estate north of Berlin on Tuesday evening, European Commission President José Manuel Barroso cautioned against complacency, and in an apparent dig at Germany warned against "procrastination".

"One of the messages from the markets is clear – let's not react behind the curve," he said.

(EurActiv with Reuters.)

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Timeline: 
  • 24-25 March: EU summit aims to reach agreement on treaty amendment for euro zone's permanent stability mechanism.
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